Overall Irish M&A activity showed some positive signs in
2012. While deal data suggests that the number of transactions did
not change drastically, the value of transactions for the year
increased on 2011. This has helped to create a positive expectation
for 2013, with market participants cautiously optimistic that
activity will increase. Generally, the Irish economy looks to be on
a stronger footing than this time last year. It is estimated that
Irish GDP grew by 0.5% in 2012 and growth in GDP of 1–1.5% is
forecast for 2013, which compares favourably to the rest of the
eurozone. 2012 also saw large flows of foreign direct investment
into the country and strong export sector performance with the
value of Irish exports increasing to €92 billion ($120.2
billion) in 2012, helped by increasingly competitive market
conditions in Ireland.
Certain trends appear to be emerging in Ireland on analysis of the
recorded M&A activity for 2012 and there are a number of areas
and sectors where, based on those trends, continued growth is
expected in 2013.
Deleveraging of non-core assets of financial institutions
In 2012, financial institutions in Ireland continued to shrink their balance sheets through deleveraging of non-core assets and that trend is likely to continue through 2013. The biggest deal of 2012 in this regard was the acquisition by Sumitomo Mitsui Financial Group of RBS Aviation Capital from The Royal Bank of Scotland in a €5.8 billion deal. The sale generated significant interest, with a number of bidders involved in the process, including China Development Bank and Wells Fargo.
Many of the domestic Irish financial institutions have already
disposed of overseas subsidiaries and businesses as well as certain
Irish assets, such as insurance and financial services subsidiaries
that are regarded as non-core. There are, however, still
significant opportunities in terms of non-core assets to be
acquired, with the focus now turning to the disposal of Irish loan
portfolios and distressed Irish property assets. There is
considerable international interest in Irish loan portfolios and
property assets from private equity funds, sovereign wealth funds
and other specialist investors, as evidenced by Apollo's
acquisition of both the MNBA Irish credit card receivables book
from Bank of America and a €1.8 billion Irish loan portfolio
from Lloyds Banking Group. A number of transactions involving loan
portfolios and distressed property assets are expected in
2013.
The Irish Bank Resolution Corporation (IBRC; previously Anglo
Irish Bank) was placed in special liquidation in early February
2013 holding €16 billion in outstanding loans, which the
liquidator will seek to dispose of in the coming months. In
particular, the sale of a €2 billion loan book, called Project
Delta, prepared by IBRC before being placed in special liquidation,
is under consideration by the liquidator. Given the work already
put in by IBRC on the project before the liquidator's
appointment, it is likely that he may seek to dispose of the
portfolio in the near term. It is anticipated that any loans not
disposed of by August 2013 will be transferred to the National
Asset Management Agency (Nama), Ireland's bad bank structure
which holds land and development and associated loans acquired from
bailed-out Irish financial institutions. Nama itself has indicated
that its sales target for 2013 is between €3 billion and
€3.5 billion, which will have to be achieved either through
sales of loans/portfolios of loans or through sales of the
underlying assets.
Food and agriculture
The food and agriculture sector has been a big success story for
Ireland in 2012, contributing €9 billionin exports for the
year. Ireland's reputation for having a high level of food
safety has been key increating opportunities for Irish food and
beverage companies and brands globally and it will be vital that
this is maintained in 2013, in particular in light of recent
European food fraud scandals. A recent report by Grant Thornton on
the food and beverage industry in Ireland noted a 32% rise in the
value of M&A activity in the sector in 2012, reaching an
aggregate value of €726 million for the year. There is a
strong demand for Irish brands worldwide, both from consumers and
from businesses and investors seeking exposure to the premium
brands that Irish food and beverage products can offer. This is
likely to accelerate as the middle classes in emerging markets,
particularly Asia and the Brics nations, continue to grow rapidly
and consumers there continue to develop an appetite for western
premium food and beverage products.
Cash-rich businesses in these emerging economies are increasingly
looking to mature markets for expansion opportunities and see Irish
businesses as good targets as they can grant them access to quality
brands and advanced manufacturing technology and processes. The
food and beverage industry in Ireland, in conjunction with the
Irish government, is also driving this demand by placing increased
focus on emerging markets. Many initiatives have been launched to
strengthen ties with emerging market countries, including Kerry
Group's partnership with Beingmate of China, which supplies
Irish dairy constituents for infant formulas. The Irish Dairy Board
has been particularly successful in building a global market
presence and Irish-branded dairy products are exported to countries
all over the world. There should be further consolidation in the
dairy sector over the next year to two years as Irish dairy
producers prepare to capitalise on the premium reputation of Irish
dairy products globally when milk quotas are abolished in 2015.
Technology
Irish M&A activity in the technology sector was relatively
quiet in 2012. It is likely, however, that 2013 will see positive
levels of growth in this sector. For various historic reasons,
Ireland has a disproportionately large technology and emerging
company sector relative to its European peers. A very evolved
equity funding ecosystem has developed around this sector,
comprising institutional seed capital, venture capital and
development capital. This is a sector that the government continues
to invest in through Enterprise Ireland, the Irish state economic
development agency. The net result is that there are many venture
capital-backed companies in Ireland with an eye towards an ultimate
exit. Most will not reach the heights of Irish success story
Fleetmatics, which had a very successful IPO in New York in 2012,
and will be acquired by overseas strategic acquirors for prices
typically in the range of $20 million to $100 million. A small
subset of Irish technology companies will be bought by private
equity buyers, such as Exponent, which acquired Fintrax at an
estimated value of €170 million in 2012.
Private equity-backed acquisitions tend to be good news for
Ireland generally as they often mean that holding companies and
target businesses remain in Ireland. Good examples include the
Hellmann and Friedmann acquisition of Web Reservations
International, best known for its Hostelworld brand. There can also
be positive tax benefits for US companies in acquiring companies in
Ireland. If US companies are seeking to establish a European
headquarters in a jurisdiction that fits within their global tax
structure, Ireland tends to be an attractive choice.
Clearly, technology buyers have significant funds on their balance
sheets to make acquisitions; however, deal terms have hardened in
favour of buyers in recent times with larger escrows, holdbacks and
more buyer-friendly risk allocation becoming more common.
Aviation
2012 witnessed a global trend for consolidation inthe
aviation sector and this trend looks set to continue for 2013,
globally and in Ireland. Ryanair's latest bid to acquire a
stake in its Irish rival airline, Aer Lingus, has been blocked by
the European Commission and, as such, the Irish government's
stake in the airline is potentially again open to acquirers
(although Ryanair has indicated that it will appeal the European
Commission decision). It looks likely that another airline will
seek to acquire the stake, with Aer Lingus' lucrative Heathrow
slots looking particularly attractive. Etihad Airlines currently
holds a small shareholding in Aer Lingus and has previously
indicated an interest in increasing its stake in the airline.
Whether Etihad pursues this or not, some activity involving Aer
Lingus seems possible.
Air France has announced its intention to dispose of its
subsidiary airline, Dublin based CityJet, and is now believed to be
in the process of reviewing bids. The aviation and related services
sector generally is thriving in Ireland and has been singled out by
the Irish government as an area for further consideration and
development. The government's budget for 2013 introduced
accelerated capital allowances for the construction of certain
aviation specific facilities, which should drive further investment
activity in the sector. Ireland is home to a number of the largest
aircraft leasing operations in the world and, following the
successful sale of RBS Aviation Capital in 2012 and the level of
interest that it generated, it would not be surprising to see
further movement in the sector. Companies operating in Ireland in
the aircraft leasing industry include GE Capital Aviation Services,
AWAS, Avolon, Pembroke Leasing and Orix Aviation.
Disposal of Irish assets
The Irish government is required, pursuant to the terms of the funding conditions set by the EU, ECB and IMF, to dispose of state assets in order to raise funds which will be used both for paying back the bailout funds received by the state and for investment into the economy. In accordance with these obligations, the government set up a special review group commissioned to investigate potential restructuring or disposal of assets held by the state. Following publication of the report of that group, the government established the New Economy and Recovery Authority (NewERA), which is tasked with the oversight of the commercial state sector in Ireland, including advising on the disposal or restructuring of State assets.
For most of 2012, no further public steps were taken in relation
to any sales process for state assets. However, in the final months
of 2012 and the early months of 2013, the government has
significantly progressed its aspirations in this area. In February
2013, it announced that a sale of Irish Life (the largest life
assurance company in the State) had been agreed with Great-West
Lifeco of Canada in an estimated €1.3 billion deal, although a
legal challenge to the sale has been initiated by certain minority
shareholders. The sale process in respect of Bord Gais Energy is
also under way, under NewERA stewarding. The government has also
announced plans to sell non-strategic power generation assets of
the Electricity Supply Board, certain assets of Coillte (the State
forestry agency), most likely harvesting rights to its forests, the
government's 25% shareholding in Aer Lingus and the licence to
run the Irish national lottery.
How to acquire from the state
There is a significant degree of international interest
in acquiring assets from the Irish state, but it is not clear to
potential acquirers how such acquisitions can and should be carried
out and how, if at all, they differ from a typical
acquisition.
Parties interested in acquiring state assets may make inquiries of
the government about potential opportunities, in accordance with
the official protocol on meetings with market participants and
advisers published by NewERA last year. The protocol sets out
guidelines as to how such meetings should be sought, stating that
interested parties should make contact with NewERA in the first
instance to arrange a meeting, rather than contacting any
government official or Minister directly. NewERA will coordinate
the arrangement of agreed meetings. Once a request for tender has
been issued by the government or a government agency in respect of
services to assist with any sale or restructuring process however,
no further informal discussion or engagement on such process or
matters related thereto will be facilitated. Once professional
advisers in respect of the process have been appointed, potential
bidders are required to deal with those advisers only.
The interplay between political and policy considerations involved
in a decision to sell state assets and the normal commercial
tensions that arise in an acquisition can mean additional
complexity and protracted deal times. The first step a prospective
purchaser should take is to identify the asset being sold. Any
State asset sale may need to be preceded by some form of
restructuring or reorganisation, in order to package the asset that
the government has decided to dispose of. Whatever structure the
sale takes, new legislation will generally be required in order to
facilitate the sale and to enable the relevant Minister to give the
necessary warranties and indemnities, if relevant.
As in any acquisition, one of the principal commercial points to
be negotiated by the parties will be price. The manner in which the
payment will be structured will be a key factor in this regard.
Before the credit crunch, payments were typically made in full
upfront; since 2008/2009, however, more and more deals have
involved a deferral of a portion of the price for a set period
following close of the transaction. It remains to be seen whether
the government will be willing to accept any deferred payment of
this nature and such matters will be for negotiation between the
seller and purchaser in the normal manner. The strength of the
government's position looks to have improved in recent times as
it has regained access to the international finance markets,
reducing the pressure on it to provide added incentives to
purchasers in order to achieve quick sales. It is noteworthy in
this regard that the recently agreed sale by the government of
Irish Life to Great-West Lifeco appears to be based on a full
upfront payment upon satisfaction of necessary conditions to
closing the acquisition, although it is not known whether any of
the payment will be subject to any escrow arrangements.
Due diligence has become more extensive since the advent of the
global credit crunch as purchasers have become generally more wary.
This may prove to be even more relevant for prospective purchasers
of state assets, as a state seller may be less willing than a
typical seller to give extensive warranties or indemnities. Due
diligence undertaken by prospective purchasers should establish
what property, rights and liabilities the undertaking(s) being sold
has/have, which in turn should inform any decision on how assets
will be allocated and also will allow any necessary restructuring
to be carried out.
Particular consideration should be given to how employees of any
relevant state companies will be treated following an acquisition.
In a share sale, employees will continue to be employed by the
employer company on their terms of employment at that time and a
purchaser would need to review the relevant employment terms to
determine whether they would be willing to maintain them. This is
particularly relevant in the context of pensions, given the
generous nature of the entitlements enjoyed by many employees of
state enterprises. It may be necessary for pension arrangements to
be reorganised before a sale can take place. In the case of an
acquisition of a specific asset or bundle of assets from a state
company, the Transfer of Undertakings (Protection of Employment)
Regulations 2006 – better known as Tupe – may apply. If
these regulations are found to be applicable, employees engaged in
the business will be transferred to the purchaser on their current
terms of employment. If a purchaser does not wish to retain the
transferring employees, possible claims for redundancy and/or
unfair dismissal would need to be considered. Pension entitlements
do not automatically transfer under theseRegulations; however, a
purchaser would need to consider whether pension entitlements
should be maintained in their current form or whether a new pension
scheme and corresponding entitlements would be implemented.
Given that some state companies have employee share option plans
in place, it may be necessary for purchasers to give some thought
as to how option holders should be treated in the context of the
sale and whether any such scheme will be maintained post-sale. For
example, employees of Bord Gais hold a reported 3.27% of equity in
the company through the company's employee share ownership
plan. It is not known how it is intended to deal with the employee
shareholders on the sale of Bord Gais Energy.
Any discussion around entitlements and employees generally will
need to be framed in the context of the active trade union
representation of most employees of state companies and any
prospective purchaser will need to have regard to the positions
adopted by the relevant trade unions.
Sales of state assets should also be considered in the context of
state aid, particularly where the disposal is effected through a
private trade sale. In accordance with guidance issued by the
European Commission, several conditions should be observed in order
to avoid any state aid implications. The first is that a
competitive tender must be held that is open to all prospective
purchasers, transparent and not conditional on the performance of
other acts. Secondly, the asset must be sold to the highest bidder.
Finally, bidders must be given enough time and information to carry
out a proper valuation of the assets as the basis for their
bid.
If these conditions are not observed, trade sales must be notified
to the European Commission for assessment on whether state aid in
contravention of EU law is present.
The structural, legal and commercial issues highlighted above are
likely to mean relatively lengthy sales processes for state
companies. Notwithstanding the potential issues, however, there is
an appetite for state assets and, combined with the
government's obligations under the EU/ECB/IMF bailout
programme, it is likely that there will be more activity in
relation to state assets in 2013.
This article was first published in IFLR Mergers and Acquisitions in 2013.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.