A Growth Trend
This article was first published in IFLR Mergers and Aquisitions in 2013.
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.
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.
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.