A feature of M&A activity in Ireland right now is its international flavour.
"We have seen an increasing number of cross-border transactions, much of it from global funders whose names wouldn't be familiar here," says Katharine Byrne, partner and head of the BDO corporate finance team.
Technology and healthcare companies are particular targets, such as CareChoice, the nursing home operator acquired by French investment fund InfraVia Capital Partners last year in a deal understood to have been worth about €70 million.
“Such purchases demonstrate longer-term thinking on the part of these funds as they seek to find homes for their cash and Ireland, as an English-speaking, EU member state is an attractive location,” says Byrne, who also predicts an increase in the number of non-core assets being sold off by multinational companies in 2018.
It’s a trend that was in evidence last year, as demonstrated by the sale by One51 of Clear Circle, for a reported €30 million. “In doing so, One51 transformed itself from a diverse industrial group into a plastics one. We predict you’ll see the same in a number of sectors, triggering a round of MBO activity and giving local private equity funds opportunities to invest.”
Also driving international M&A activity is a demand for strategic acquisition of tech-enabled companies as a defensive move, to guard against competition and ‘disruption’, says Byrne. And while geopolitical uncertainty led to worries about the year ahead in early 2017, the mood today is much more sanguine.
“Last year, M&A activity went ahead anyway but confidence was fragile. This year we are anticipating that people both here and internationally will be more familiar with the political situation. After all, we started last year with Trump and Brexit, so people probably thought there would be less [M&A] activity than there actually was. What did happen was that deals took longer to complete. This year we expect that will speed up, as people have gotten used to political uncertainty.”
Last year was a quiet one for 'mega deals'. Among the biggest was the acquisition by Dubai Aerospace of Dublin-based Awas Aviation Capital, creating an almost €13 billion aircraft-leasing business.
"But when you drop down to the €100 million to €200 million level, there was a lot more activity," says Byrne. This included the MBO at IT services provider Version1, backed by London firm Volpi Capital. It also included the sale of the Viviscal hair product brand to US-listed Church & Dwight.
Chocolatier Lily O’Brien’s was sold by the Carlyle Cardinal Ireland Fund – and members of the management team– to a Polish company for € 40 million.
As familiarity with private equity grows here, more internationally flavoured deals are likely to follow.
“And because there is an increasing amount of funds available, all desperately seeking new opportunities to invest and in the process pushing valuations higher,” says Byrne.
Low-interest-rate environment
Another factor fuelling deals is the sustained low-interest-rate environment. "The big fear is always a fundamental change in global sentiment, but the reality is there is so much money out there looking for a return, and a lack of alternative ways to make one – banks are offering negative returns," says Nicholas O'Gorman, a director of Davy Corporate Finance.
It’s why, despite all the geopolitical shocks of the past year and a half, the elections, referendums and protectionist rhetoric, market sentiment proved resilient.
For Irish companies with a significant exposure to the UK market, the mood is less ebullient.
The UK has always been the natural first step for overseas acquisitions. "Although we don't yet know what Brexit will look like, already it has presented Irish businesses with real challenges in the form of currency volatility and fears about customs and tariffs," says Mark Collins, partner and head of transaction services at KPMG. For Irish firms on the UK acquisition trail, the conundrum is pricing in the risk.
In the meantime, there is evidence of investment starting to come here on foot of decisions by international investors to move capital away from sterling and the UK, he says.
But while Brexit presents challenges, might there not also be opportunities for firms here to acquire a UK business – at a discount thanks to the fall in sterling – with a view to selling to its market of 60 million people, without having to worry about customs tariffs and currency swings?
“Fine if you have the cash and resources to do it but with the Brexit cloud darkening, if you’ve got to make a case to others in order to secure funding for such a move, that’s becoming a harder case to make,” Collins says.
By contrast, the wider European M&A market saw a strong uplift in activity in 2017, with good momentum leading into 2018, says Liam Booth of Investec.
“Underpinning that is a strong European economy, now in its fifth year of growth, with the pace of growth accelerating. Europe is now seen as an attractive market for M&A activity, providing growth opportunity. The EU has come through the existential crisis of the euro, for now, and as the economic climate improves there are more opportunities,” says Booth.
“There are clouds of uncertainty over the UK, however, and while there has been a bit of a lag in relation to the impact of the Brexit vote, it seems to be starting to impact the UK economy now.”
Ultimately for big Irish businesses looking to grow even bigger, there is no option but to get on the acquisitions trail. “For a lot of Irish PLCs, the Smurfits and the Kingspans, there’s only ever a limited amount of organic growth open to you. If you are to continue to scale, an acquisition strategy is necessary,” says Mark Collins of KPMG.
“And I think there is an acceptance too that, despite fears last year about elections in Holland and France, these events resulted in reasonable outcomes. They had the capacity to throw us off but they didn’t. Stock markets stayed stable. People are reacting in a more measured way. Yes there was a lot of volatility in 2016. Now I think people have just gotten used to it.”
