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Deal of the year 2003: Madison Dearborn’s €3.7 billion LBO of Jefferson Smurfit Back  
The taking private of Jefferson Smurfit has been voted the corporate finance ‘Deal of the Year’ 2003 by Ireland’s top plcs.
IIn the second annual FINANCE ‘Deal of the Year’ poll, Ireland’s top public companies voted on twenty-four of the top M&A deals in Ireland as nominated by Ireland’s leading corporate financiers.
Following on from Irish Life & Permanent’s E430 million acquisition of TSB Bank, which garnered the award last year, the chief executive officers and financial directors of Ireland’s leading plcs voted the taking private of the Jefferson Smurfit Group (JSG) into the number one position.
In last month’s FINANCE we profiled each of the 24 deals, and the plcs were then asked to select their three most admired deals on the basis of strategic fit, perception of the quality of deal making (including corporate finance advice), financing and benefit of the acquisition to the acquirer. The table adjacent reveals the top five most admired deals for 2003.

The acquisition of JSG was a landmark deal and was the biggest ever deal involving an Irish company, surpassing recent large deals such as the €3.6 billion acquisition of eircell by Vodafone in 2002 and the €3 billion leveraged buy-out of eircom in 2001.

A sophisticated transaction, the deal involved not only a cash offer for JSG’s shares, but also incorporated the spin-off to shareholders of JSG’s equity interest in the Smurfit-Stone Container Corporation, in exchange for the cancellation of a portion of JSG’s share capital, which worked out at approximately €3.20 per share.

Moreover, as well as being subject to UK and Irish takeover rules, the deal was also subject to US tender offer rules, which added an additional complexity.

Detailing the background to the acquiisition, Mark Kenny, who at the time of the deal was executive vice president of equity capital markets, JSG, but is now a principal in investor relations consultancy, K-Capital Source, said that collectively JSG’s management team believed that the market capitalisation of the company didn’t reflect the intrinsic value of the company, due to Jefferson Smurfit’s complex capital structure. This structure meant that the value of Jefferson Smurfit’s investment in Smurfit Stone wasn’t reflected in the stock price. The management therefore, were committed to ‘unlocking’ this value.

The approach from Madison Dearborn was unsolicited says Kenny, and was made by John Canning Jr., Madison Dearborn president to Dr. Michael Smurfit, JSG chairman & CEO.
While it was Madison Dearborn’s first deal in Europe, it already had considerable exposure to the US paper and packaging sector through its holdings in Packaging Corporation of America and Riverwood International amongst others.

Key to the success of the deal, says Kenny, was the relationship between the two key players, Michael Smurfit and John Canning, as well that between Gary McGann, JSG President and Martin Rafferty, JSG Senior Independent Director and Independent Committee Chairman. Gary has since become JSG CEO.

Speaking to FINANCE on Madison Dearborn’s behalf was Thomas Souleles, managing director at Madison Dearborn. He said that Madison Dearborn was interested in JSG because it was a, ‘company whose management had demonstrated a history of vision and leadership in the industry. They were early proponents of the strategy of industry consolidation, capacity rationalization and producing to demand rather than to inventory. This has now become a broadly accepted strategy, and the industry is better for it.’

Madison Dearborn’s investment in JSG was its fifth investment in the paper sector and followed investments in Buckeye Cellulose (1993), Bay State Paper (1994), Riverwood International (1996), and Packaging Corporation of America (1999).

Echoing JSG’s management’s sentiments, Madison Dearborn believed that an investment in Jefferson Smurfit was timely, because its management team was already pursuing a strategy of divesting non-core assets, reducing costs and simplifying the structure of the company, yet these actions had not been reflected in the stock price.

Financing the deal was anything but run-of-the-mill said Souleles. ‘With the assistance of our advisors, we structured a creative and aggressive capital structure. In the end, the transaction was the largest European leveraged buyout to date, the largest European public-to-private deal to date, and included the largest high-yield issuance in a leveraged buyout to date. And, this was accomplished in a difficult financing market. The success of the financing can be attributed to the company’s excellent reputation in the US and European capital markets and the high quality of its management team.’

Merrion Corporate Finance, Deutsche Bank and Arthur Cox advised Madison Dearborn on the transaction, while IBI Corporate Finance, UBS Warburg and William Fry advised JSG.
Describing the deal as both a landmark deal for the Irish market, as well as for Merrion, John Conroy, managing director of Merrion Capital Group, said that, ‘In its near 40 year life as a publicly quoted company, the Jefferson Smurfit Group generated more excitement in its ground breaking corporate deals than any other Irish company. It was fitting then that its final deal as a public company, the take-private of the group, should be remembered as the landmark deal of the year. Merrion was delighted to have acted for the buyout group (Madison Dearborn and Smurfit management) and to have been able to use our in-depth familiarity with the Smurfit Group and its shareholding base and our knowledge of, and expertise in, the complexities of take-overs and take privates to ensure a smooth and successful transaction.’

James O’Dwyer, senior partner, who led the Arthur Cox team representing Madison Dearborn said, ‘This was the largest deal ever concluded in Ireland. The spin-off of shares in SSCC, and the financing arrangements, added further layers of complexity’.

In second place was M&T Bank’s $3.1 billion merger with AIB’s US subsidiary AllFirst. According to AllFirst corporate finance advisor, AIB Corporation Finance, this is a strategic partnership aimed at creating a major US regional bank, and the bank will be amongst the top twenty largest US banking companies with pro-forma combined assets of approximately &#xx20AC;49 billion as of June 30, 2002.

As a result of the merger, AIB will acquire a strategic shareholding of 26.7 million M&T shares, which, on the basis of M&T’s issued share capital at the date of the announcement, represents a stake of the order of 22.5 per cent in the enlarges M&T. AIB will also receive $886 million in cash. AIB Corporate Finance and Arnold & Porter acted as advisor to AllFirst, while Lehman Brothers and Wachtell, Lipton, Rosen and Katz advised M&T Bank.

The Musgrave group had two acquisitions nominated for the ‘Deal of the Year’ - Budgens plc and Express Checkout, and the Group’s ?167 million acquisition of UK based retailer Budgens was voted into third place. This deal was announced in June 2002, when Musgraves made an offer for the remaining 72 per cent of the share capital of Budgens (it had acquired the other 28 per cent in August 2000). The offer valued the entire share capital of Budgens at about ?231.6 million. AIB Corporate Finance and Hawkpoint Partners advised Musgrave whilst Arthur Cox SJ Bernin acted as Musgrave’s legal advisors. Dresdner Kleinwort Wasserstein and Herbert Smith acted as advisors to Budgens plc.

Corporate finance participants to the survey were: Michael Neary, director of Grant Thornton Corporate Finance; Bobby O’Brien, director in Goodbody Corporate Finance; Leo Casey, associate director at IBI Corporate Finance; Pat Landy, managing director of Merrion Corporate Finance; Ivan Murphy, director at Davy Corporate Finance; Ronan McGovern, associate director of AIB Corporate Finance; Sinead Munnelly, senior manager in Ernst & Young Corporate Finance; Paul Keenan, lead partner in BDO Simpson Xavier Corporate Finance; Jim Lillis, director of CFM Capital; David Chapman, managing director of CFM Capital; Fergus McLoughlin, director at NCB Corporate Finance; Michael McGrail, head of PwC Corporate Finance; John Dillon, associate director at KPMG Corporate Finance; David Tynan, M&A director at PwC Corporate Finance; Bryan Evans, lead M&A partner at PwC Corporate Finance; and Hugh Cooney, corporate finance partner in BDO Simpson Xavier.

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