| Major deals and big brands: a review of 2006 |
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| It is not an exaggeration to say that 2006 was one of the hottest years on record for corporate banking. While there were a number of massive deals during the year, the real buzz in the sector had as much to do with the brands involved, as with the value and nature of the transactions, writes Rachel Naughton. |
Names like eircom, Aer Lingus, Davy Stockbrokers and Fyffes - some of the biggest names in Irish business - were involved in transactions during 2006. More importantly, these deals served as heralds of what is to come in the future, as foreign investors eye Irish assets, management teams look to take full control of their businesses and State-owned resources move into the hands of private investors.
Any review of the year has to begin with eircom, a deal that dominated the business headlines for months. With its long history of IPOs and leveraged buyouts -- not to mention its own recent acquisition of Meteor -- the purchase of eircom was guaranteed to be a media storm. Moreover, the acquisition of the telecoms company by Australian firm Babcock & Brown underlines the immense value inherent in Irish businesses, prompting market watchers to speculate about other assets in Ireland under the scrutiny of foreign companies and investment vehicles.
For the global investment and advisory firm Babcock & Brown (B&B), eircom represented an obvious opportunity to acquire a strong company with a large element of regulatory assets, which fit perfectly with the profile of B&B's investment strategy. At the same time the eircom Group realised it had an opportunity to extract maximum value for shareholders. With the shares held predominately by institutional investors, B&B was able to carry out a leveraged buy out which was 80 per cent debt financed, with approximately 65 per cent of that senior debt. More recently B&B re-leveraged the business through the issuance of a PIK note releasing a dividend to the equity shareholders thus showing B&B's ability to re-engineer an asset heavy company's balance sheet and profit and loss through optimal operation and financing of various asset classes.
Looking inward
Of course, Irish companies were also keen to release the enormous value locked away in their own assets. A telling sign of this trend came with Jurys when the firm sold the Jurys' Hotel Group land at Ballsbridge to Sean Dunne for €380 million, making it one of the largest commercial land acquisition transactions in the history of the Irish Republic.
Fyffes soon followed with management realising it could release the value of the company's property assets in order to add shareholder value. To bring this about, Fyffes, in a clever move, separated its operating activities from its property investments - named Fyffes and Blackrock respectively -- and now runs each business somewhat independently, which has allowed the company to maximise the potential of each element of its business. Ultimately, the result of the reorganisation left the company with approximately €200 million in property assets and no debts.
In terms of how the Fyffes / Blackrock deal was financed, no details exist in the public arena. However, the company had €120 million of debt in its accounts so it is safe to presume the company leveraged the existing property assets to drive further growth and increase shareholder return. After the completion of this deal, Blackrock rapidly expanded its property portfolio to over €350 million and has seen strong share price increases - achieving the primary goal of maximising shareholder value. The significance of the deal was the realisation of inherent value through separation of key assets in the business.
Masters of their destiny
While all major deals will invariably get the investment community chatting, none caused as much discussion as the Davy's Stockbrokers management buy-out. It represented one of the major deals in value terms, with a price of €350 million. Davy's was a separate, identifiable business brand, but was over 90 per cent percent owned by the Bank of Ireland Group. Yet despite this, Davy management -- including Brian Davy, Tony Garry and Kyran McLaughlin -- held the majority of voting rights on the board and the remaining equity.
In these circumstances Bank of Ireland faced a dilemma: Davy's staff were looking for an equity stake in the company and if that did not happen there was a strong risk that a number of key personnel would depart, damaging the business. At the same point, Bank of Ireland realised that while Davy's was a profitable asset, the business unit did not have any major restating of future earnings available, nor did Davy's require the bank's balance sheet for support. In the end the MBO was the most obvious option. The deal was financed by Anglo Irish Bank although the details were not disclosed, apart from Bank of Ireland receiving a four year claw back on the proceeds of any sale. There was also an equity carve out with 110 members of staff taking shares in the business.
Another outstanding example of a keen management team taking the helm came in the form of the BWG deal, when Electra Venture Capital wanted out and management wanted in. The deal was completed through a combination of management equity and tiered bank debt with AIB acting as the sole arranger and underwriter of the deal. The result was that the management team was able to achieve its goal and is now executing its own strategies. However, the lasting significance of an Irish management team completing an MBO for a successful business from a UK venture capital house should not be underestimated, and could be the forerunner of a number of similar deals to come.
Given the increasing level of interest in energy related issues, the SWS deal was one of the more interesting deals of the year. In late 2006 ION Equity made a successful approach for the West Cork SWS Group, offering €110 million for the wind energy and waste outsourcing businesses after an earlier offer from Philip Lynch's One51 Group was rebuffed. Apart from the price, the SWS deal seems, in some respects, to be unremarkable. But a closer look reveals some exciting trends about the potential for growth in SWS' core businesses, and emergence of the firm from its origin as a small cattle breeding business, thanks almost entirely to good strategic vision and strong management direction.
High-flyers
No review of the deals of the year would be complete without looking at the Aer Lingus IPO. If media commentary is any indication then this was undoubtedly the most talked about deal of the past twelve months. The motivations behind the deal are well established: the airline needed access to new capital to fund its expansion plans and provide financial stability. There were also various strategic objectives that the State needed the company to achieve, including the maintenance of landing slots at London Heathrow, provision of excellent global connectivity to and from Ireland, and the continuing operation of direct transatlantic flights.
As such, the IPO went ahead, and AIB Capital Markets and UBS Investment Bank acted as joint global co-ordinators and underwriters for the flotation, which when completed, gave the new Aer Lingus a market capitalisation of €1.16 billion. The total proceeds from the floatation were €740 million with €534 million going to Aer Lingus and the remainder to the State, which along with Aer Lingus employees held on to a portion of the equity in the airline. The deal, while significant in the context of Irish business, will ultimately have even deeper ramifications, as it demonstrates the continuing trend toward privatisation of State-owned assets.. Moreover, the deal further reinforced that health of the Irish infrastructure sectorand the potential for more activity in the years to come.
Aer Lingus, along with eircom, Davy's, Jury's, Fyffes and all of the other deals of 2006 are more than just large complex transactions, involving bright managers and savvy investors. These deals represent the spirit of Ireland's current business climate, in which the country's largest firms are recognising that they have either enormous potential for further growth, or unrealised assets hiding away on balance sheets - or both. The accumulation of resources in Ireland's corporations - including assets, capital and business acumen - has persisted for over a decade, and has paved the way for Ireland's business leaders to hammer out even grander and more innovative deals. It's almost a certainty that we'll see.many more transactions of this nature in the next 12 months increasing further the value of corporate Ireland. |
Rachel Naughton is the head of corporate business development in AIB Corporate Banking Ireland.
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| Article appeared in the March 2007 issue.
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