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Outlook is promising, as Ireland looks set to buck global trend Back  
The Irish corporate finance sector is set to have a busy year writes Peter Crowley, as privatisations of Government owned assets looks increasingly likely, and more international equity houses sizing up potential Irish buy-outs.
The outlook for Irish corporate activity over the next twelve months is very promising. Once again, the Irish market looks set to buck the international trend in this regard. With the exception of one or two significant deals such as the ongoing Safeway takeover battle in the UK, M&A activity in the European arena remains slow and wholesale investment banking redundancies are the order of the day in the City.

Privatisation is back on the agenda
The privatisation of State-owned assets has taken a back seat in the recent past. Political appetite for pushing the privatisation agenda dissipated in the wake of the eircom debacle and the aborted IPO of Aer Lingus and was always unlikely to be re-kindled in an election year. However, with a new Government in place and given the deteriorating state of the national finances, the market is once again rife with rumours regarding the possible sale or partial sale of semi-state companies.
The front-runner in this regard appears to be Aer Lingus, which has undergone an impressive turnaround under the stewardship of Willie Walsh, and is now a profitable and much leaner business. It is understood that private equity players are already circling and that certain international houses have already registered an interest regarding Aer Lingus with the Department of Transport. However, any sale or partial sale of Aer lingus is unlikely to be given an official green light until the threat of war in Iraq has abated.

Other potential privatisation candidates of a scale required to deliver substantial proceeds to the State are Bord Gais, which has recently been converted to plc status and the ESB. Alternative forms of privatisation (to an outright sale) may be considered for other semi-state assets, e.g. a possible break-up of CIE appears to be under consideration by the Minister for Transport.

Further departures from the ISEQ likely
Following on from the high profile public-to-private transactions such as the management buyout of Green Property and the Madison Dearborn led LBO of Jefferson Smurfit Group that marked out 2002 as an exceptional year for corporate activity (and for IBI which advised on both deals!), many commentators are predicting an acceleration of this trend in the current year. Recent media speculation has named practically every lowly rated Irish plc as being the next in line to disappear from the ISEQ!

This is clearly an improbable scenario. While further take-privates are likely, the level of activity is unlikely to increase dramatically given the inherent complexity of these transactions and the fact that many listed Irish companies are simply not suitable take-private candidates. Specifically, while many small to mid cap stocks suffer from serious share price underperformance (the obvious pre-requisite for considering a take-private), many fall down on one or more of the other key criteria required to make a compelling take private candidate i.e. having a cash generative business with significant debt capacity, a value enhancing story and a clear exit strategy over a three to five year timeframe.

That said, international private equity houses have never been so active in terms of sizing up potential Irish buyouts. This factor, coupled with an unprecedented availability of leveraged finance at keen interest rates, means that the take-private option will remain firmly on the agendas of many Irish CEOs for the foreseeable future.

Apart from paying a fair price, an important aspect of a successful (rather than merely opportunistic) MBO is the degree to which management teams have made all reasonable efforts to create shareholder value before deciding to pursue the take private route. This was certainly a feature of the Smurfit and Green transactions and underpinned their saleability to the market.
It is also interesting to examine some of the emerging themes from recent and ongoing deals in terms of their implications for future transactions. The Riverdeep deal is an interesting case in point. In light of concerns in certain quarters that the independence of the independent committee may have been called into question in light of historic relationships that had developed, the company appointed a new, experienced independent director to the board with specific responsibility for considering the management bid. This initiative was well received by the market and may well set a precedent in terms of good corporate governance in future deals. There is no doubt that a strong independent committee is an important factor.

Another positively received aspect of this deal was the fact that Barry O’Callaghan and Pat McDonagh, the two largest shareholder members of the MBO team, irrevocably committed to accepting a counter-offer at least ten percent higher than the management bid (although the offer was only open for a portion of the takeover timetable). This initiative was favourably received by independent shareholders as it clarified management’s intentions vis-?-vis potential counter-bidders and left the door open for possible higher offers. In sharp contrast, comments by certain members of the Alphyra MBO team stating that they viewed an indicative counter-bid by FDC as ‘hostile’ are clearly an example of how not to react to a competitive situation.

IPO market likely to remain closed in short-term
The IPO market was effectively closed throughout Europe during 2002. From an Irish perspective, it was very disappointing to see excellent companies such as C&C and fast growing, emerging companies such as Spectel being forced to abandon their IPO plans last summer in the face of extremely turbulent equity markets. Fortunately, an IPO was not a ‘must do’ deal for either company and both companies may well reconsider an IPO in the future.

The situation shows no signs of improving so far this year as stock markets continue to plummet and investors remain under pressure. A return to healthy levels of IPO activity will only start to happen once equity markets have stabilised for at least two or three quarters. In an uncertain macroeconomic environment and with a war threat looming, this is unlikely to happen in the short term.

Buoyant private company M&A activity to continue
M&A activity in the private company arena was very robust during 2002 and this trend is likely to continue going forward. In particular, 2003 should see a further consolidation of media assets (newspapers, radio stations) in the wake of de-regulation in this sector. In addition, buyside interest in the broad outsourcing sector is growing given the increasing attractiveness of the outsourced business model and the need for outsourcing companies to demonstrate scale and reach in offering solutions to major corporates.

From a broad macroeconomic perspective, Ireland’s relatively strong standing in Europe means that Ireland will continue to be attractive to large US and international corporates seeking to establish a foothold in Europe. This should create sell-side opportunities for successful private Irish companies across a range of sectors.

So while a declining stock market is bad news for investors and pension funds, it does create opportunities for dealmakers. On the plus side, the availability of significant quantities of private equity and leveraged finance is a challenge to creative entrepreneurs and their advisers to find and create value. At IBI we’re looking forward to the challenge in 2003.

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