Although nominated three other times in FINANCE's 'Deals of the Year', telecommunications firm Eircom has never won an award. However, this year, Babcock & Brown's E2.4 billion acquisition of the company scooped the 'Corporate Finance Deal of the Year Award', in what is the firm's second leveraged buy-out in the space of just five years.
Babcock & Brown (B&B) formally announced its intentions in April 2006, having previously built up a 28.8 per cent stake in the company - exceeding the 22 per cent stake held by the Employee Share Ownership Trust (ESOT), the other main shareholder in the company. Prior to B&B's moves, Swisscom, the Swiss telecom, had been touted as a possible acquirer of the former Government owned firm.
Davy Corporate Finance provided advice to B&B, with Merrion Capital advising the ESOT. Goodbody Corporate Finance advised Eircom. On the legal side, A&L Goodbody offered legal services to Eircom, while Matheson Ormsby Prentice advised B&B. William Fry gave advice to the UK based financial advisers and Mason Hayes & Curran and O'Donnell Sweeney Solicitors gave advice to the ESOT.
The ESOT was a key element of the deal, as the employee participation scheme continued under the new ownership, although a mechanism for ESOT members to realise gains on their existing holding over time was also built into the structure.
According to Paul Carroll, managing partner of A&L Goodbody, 'The transaction was particularly interesting for us as it delivered a very significant return to eircom shareholders and came hard on the heels of a number of other significant transactions involving eircom on which A&L Goodbody acted, including its acquisition by the Valentia consortium, its subsequent IPO and its acquisition of Meteor'.
Dan Ennis, a director at Merrion Capital who advised the ESOT, said that the transaction was an excellent result for employees of the firm, 'as it results in them playing a more influential role in the future direction of the business given its increase in shareholding from 21 per cent to 35 per cent'.
'Despite an increased shareholding, the deal enables the ESOT to reduce a significant amount of the risk associated with its equity investment through the receipt of bank guaranteed preference shares, which will be distributed tax-efficiently over the next three years, as well as significantly reducing its existing loan balance,' he added. Post the deal, the ESOT owned 35 per cent of Eircom.
The offer price of E2.252 per share (which included an interim dividend) represented a 62 per cent total return to shareholders who bought shares for E1.55 at the time of Eircom's IPO in March 2004.
Brian O'Kelly, managing director of Goodbody Corporate Finance said that the acquisition saw realisation of value for a board and management strategy that was put in place when eircom was taken private in 2001. 'Following a period of intensive cost reduction and focus on its core business as a private company, eircom had repositioned itself as a PLC, having set out to aggressively drive broadband penetration and by effectively doubling its addressable market by re-entering mobile, following the acquisition of Meteor,' he said.
The deal was successful because of the partnership that was formed between B&B and the ESOT against a background of initial skepticism from the unions over the leveraged nature of the transaction, said Ivan Murphy, a director at Davy Corporate Finance.
Another interesting element of the deal is highlighted by Tim Scanlon, a corporate finance partner with Matheson Ormsby Prentice, who said that, 'Somewhat unusually, Babcock built up a significant stake initially as part of an eircom rights issue to fund the acquisition by it of Meteor, the third-largest mobile phone business in Ireland'. He also highlighted the significant impact the deal is expected to have on the telecommunications market in Ireland.
Equity-linked
Aer Lingus finally came to the market in October 2006, following years of 'will they, won't they' speculation. The deal was the first privatisation of an Irish company since eircom in 1999 and the first listing on the Irish Stock Exchange in over two years. Aer Lingus also listed on the London Stock Exchange, and was the first airline to be brought to market in the UK and Ireland following the flotation of Easyjet six years ago. Dermot Mannion, as CEO of Aer Lingus, was the man who made it finally happen.
The company went public on October 2nd, 2006, with an offering value of E740 million, and the company's valuation on flotation was E1.2 billion. The offer share price was E2.20. On April 17th, the price stood at E3.15, representing growth of 43 per cent since its flotation.
AIB Capital Markets (incorporating AIB Corporate Finance and Goodbody Stockbrokers) acted as global co-ordinators, bookrunners and financial advisers to the Minister for Transport and the Minister for Finance of Ireland, while Goldman Sachs and Merrion Capital advised Aer Lingus. On the legal side, Arthur Cox advised Aer Lingus, while McCann Fitzgerald gave advice to the sponsors of the deal, and William Fry advised the Government.
Alan Doherty, managing director of AIB Corporate Finance, said that there were numerous obstacles on the path to flotation, not least of which being the cyclicality and unattractiveness of the airline industry for investors. ' It is acutely sensitive to external factors beyond its control: political unrest, economic instability and military warfare; its track record has also been somewhat chequered,' he said.
Dan Ennis, a director at Merrion Capital echoed Doherty's comments. He said, 'The mixture of political and public policy interests together with commercial and market demands made for a highly challenging deal process. The IPO was further complicated by a relatively tight timeframe, an Intermediaries Offering, and a difficult market backdrop due to a high profile local competitor and record oil prices. In addition, the company had to address a number of staff issues, including pensions and a 14.9 per cent shareholding owned by a staff ownership scheme (ESOT)'.
However, he also said that the IPO was a great success for the company, as it provided it with access to capital markets and raising over E500 million in new equity which will be used to fund its future growth plans.
'The deal also a great success for the Irish Government as it allowed it to fulfill its policy of privatising Aer Lingus, thus enabling the company to fund itself for strategic growth now and in the future without recourse to public money. It also enabled the Government to realise part of the value of its shareholding, while retaining a strategic stake,' he added.
Doherty says that the IPO was preceded, 'by one of the best restructuring stories in the airline industry; one which transformed the company into a low-cost, low-fares airline'.
'The company was well-positioned and represented an all-important opportunity to invest in a growth story rather than a less appealing turnaround story. With a proven financial track record behind it, the investment case before investors was compelling. Aer Lingus had a business model designed to compete with the vagaries of a fiercely competitive market, strong brand recognition, a strong presence in the growing Irish market, and was well positioned to benefit from transatlantic air liberalisation,' he said.
Eugene McCague, chairman of Arthur Cox who advised Aer Lingus, was pleased to have been involved in the transaction. He said, 'Having acted for Aer Lingus for many years, it was great to be involved in this transaction which provided the company with the funds to enable the management team to execute its ambitious growth plans for the company'.
Of course Aer Lingus going public was not the end of the story - Ryanair quickly saw the opportunity to acquire its closest competitor in the Irish market and began accumulating shares in the company. On October 5th, with a 19.2 per cent share in Aer Lingus, Ryanair made a formal offer of E2.80 per share for the company. It was rejected by both Aer Lingus management and the Government also refused to sell its 28 per cent share on the grounds that it would, 'create a monopoly in the aviation sector in this country'. By November 29th the rival airline had increased its stake in Aer Lingus to 25.2 per cent, but Aer Lingus refused to sell.
Although Ryanair has maintained its commitment to buying the airline at some stage, there is another obstacle facing Ryanair - the European Commission is currently examining the proposed acquisition on competition grounds and is expected to make a decision by June 13th.
Innovation
The winner of this year's most 'innovative' deal is Start Mortgages' E370 million securitisation, Landsdowne Mortgages Securities No.1 plc, the first non-conforming issue in Ireland. Last year's winner was also a securitisation deal, Real Estate Opportunities commercial mortgage backed Opera deal - the first CMBS deal in the Irish market.
Start Mortgages was established in 2004 and is the largest provider of non-conforming mortgages in Ireland, with a current market share of c.70 per cent. Start is a 64 per cent subsidiary of Kensington Mortgages, one of the largest provider of non conforming mortgages in the UK, and it is a frequent issuer in the securitisation markets through its residential mortgage securitisation program, having recorded no less than 22 issues to date under the RMS program.
Deirdre Barry, head of treasury with Start, says that the level of UK issuance to date was important in enabling Start to successfully complete each of its transactions as it ensured investor awareness and appetite. It also meant the availability of a benchmark non-conforming Residential Mortgage Backed Securitisation (RMBS) model for rating agency purposes, she added.
'There were many challenges to be faced, including structural challenges such as the inclusion of a DAC equivalent in the transaction, and the appreciable level of information required by investors and rating agencies which was naturally warranted given Starts position as a young originator and a relatively new issuer,' she said, but added that, 'notwithstanding the challenges, we were very pleased with the deal, both in terms of the capital structure achieved (due to the quality of the collateral there was no requirement for a BB tranche), the pricing, and the diversification of investors that we achieved, particularly as the deal launched into a very crowded market'.
Barclays Capital were mandated to arrange and lead manage this ground breaking deal, with McCann Fitzgerald advising Start and Matheson Ormsby Prentice offering legal advice to Barclays.
Paul McEnroe, a director with Barclays, said that the key features of the deal were that it was the first non-conforming issue in Ireland; the issue priced as tightly as any other deal seen in 2006; 90% of the transaction achieved a AAA rating; investors across Europe were attracted to the transaction building a much deeper book than one would normally hope to see on a debt issue from a new lender; sun investment grade notes went to auction and were the tightest priced non-conforming BB rated notes in Europe in 2006. Also, the deal incorporated an X note providing the issuer the ability to maximise the funding efficiencies offered by the transaction.
Barclays Capital also offered the following facilities to assist the completion of the deal:
• E25.9 million liquidity facility
• a E14 million residual facility secured on the triple A and triple X rated note and a charge over the residual income. This facility enabled Start to meet the costs of the issue, fund the initial reserve fund and assist working capital requirements going forward.
The transaction proved very encouraging for Irish mortgage lenders, said Fergus Gillen, a partner with McCann Fitzgerald, as it showed that the capital markets have significant appetite and capacity to fund mortgage lending in Ireland.
Leveraged finance
The $4.5 billion reverse takeover by Irish interactive educational software publishers Riverdeep, of US educational textbook publisher, Houghton Mifflin, was the biggest deal of 2006, the largest ever takeover of a US entity by an Irish company, and the second-largest transaction in Irish corporate history.
Announced on November 29th, 2006, Riverdeep bought the firm from affiliates of private equity firms Thomas H. Lee Partners, Bain Capital Partners and The Blackstone Group. Des Carville, a director of Davy Corporate Finance, said that both companies were highly familiar with the business of the other, and the CEO of Houghton Mifflin, Tony Lucki, previously served on the board of Riverdeep, and is a personal friend of Riverdeep chief, Barry O'Callaghan.
O'Callaghan and the management group now own approximately 50 percent of HM Rivergroup, while former shareholders of Riverdeep (other than Mr. O'Callaghan) own approximately 15 percent, and new investors will own the remaining 35 percent.
The $4.5 billion figure represents a purchase price of approximately $3.4 billion for Houghton Mifflin, and a valuation of approximately $1.2 billion for Riverdeep.
Credit Suisse and Citigroup provided the financing for the deal, whilst legal advice came from almost all of the leading law firms: A&L Goodbody (Credit Suisse); Mason Hayes & Curran (Houghton Mifflin); Matheson Ormsby Prentice (Riverdeep); McCann Fitzgerald; Arthur Cox (Davy) and William Fry. Goldman Sachs provided corporate finance advice and Davy was placement agent for a portion of HM Rivergroup's common equity financing.
Matheson Ormsby Prentice advised Irish interactive educational software publishers, Riverdeep group on Irish legal matters relating to its US$4.5 billion acquisition of leading US educational textbook publisher, Houghton Mifflin, from affiliates of private equity firms Thomas H. Lee Partners, Bain Capital Partners and The Blackstone Group. The transaction was completed on 23 December 2006 and was effected by Houghton Mifflin Rivergroup PLC a newco established by Riverdeep's controlling shareholder Barry O'Callaghan for the purposes of the acquisition.
As a result of the deal, management of Houghton Mifflin and Riverdeep now own a 50 per cent (approx) stake in Houghton Mifflin Rivergroup PLC. Prior to the transaction, Houghton Mifflin and Riverdeep had combined revenues and adjusted EBITDA of around US$1,425 million and US$392 million, respectively, for the twelve months ended September 30, 2006.
Libby Garvey, a finance partner in Matheson Ormsby Prentice said, 'This is yet another example - albeit on a much larger scale given it was the largest ever takeover of a US entity by an Irish company - of the global presence and vision of Irish companies and entrepreneurs.'
The deal consisted of borrowings of $1,820.0 million under senior secured credit facilities, $1,070.0 million under a senior subordinated bridge facility, $355.0 million under a senior unsecured PIK term loan facility, $400.0 million under a new senior unsecured PIK term loan facility and the cash equity contributions made by various private equity investors.
The transaction was also notable for the significant portion of PIK (payment-in-kind) financing raised by certain of the Irish Riverdeep entities. PIK loans, (which are typically unsecured and interest accruing until maturity or ref inancing), although increasing in popularity, are still a relatively uncommon form of acquisition debt funding for Irish corporate borrowers.
Moreover, the private equity portion of the acquisition was distinctive in terms of its size (involving €660 million of new equity) and the number of participants.
Bank funding
This year's 'Best Banking Funding Deal', Ulster Bank's Celtic residential mortgage backed securitisation (RMBS), was the largest securitisation ever from the Irish market and one of the largest funding transactions ever undertaken by an Irish institution. Transacted in December 2006, it was also the first multi-currency Irish securitisation deal, issuing nine tranches of notes spread between euro, dollar and sterling, as well as being the first Irish bank securitisation deal to be rated by three rating agencies i.e. Moody's, Standard & Poor's and Fitch.
The deal, Celtic Residential Irish Mortgage Securitisation No. 11 plc, continues on from the RMBS deals First Active transacted in the past, as the firm is now a part of Ulster Bank.
McCann Fitzgerald and Allen and Overy provided legal advice, while Royal Bank of Scotland arranged the transaction.
Donal Corbett, head of debt capital markets funding with Ulster Bank, said that the deal was very well received, as it was multi-currency and multi maturity.
'There was a very high quality investor book with over 100 investors participating in the deal. A broad spread of investors was targeted through an extensive road show across Europe which saw the transaction oversubscribed and priced at or inside guidance levels in a challenging market given the level of supply in the European ABS market at that time of the year. In addition to providing beneficial matched funding to Ulster Bank, the transaction also provided beneficial capital relief as notes were issued down the credit spectrum to BBB/Baa2/BBB, thereby reducing the reserve fund (i.e. capital deduction) to 70bps,' he said.
The deal was also the first debut issuance by an Irish bank since 2000, said Hugh Beattie, a partner with McCann Fitzgerald, adding that including this transaction, Ulster Bank Group (Ulster Bank and First Active) has issued almost E11 billion in securitisation bonds to date, confirming its status as the largest issuer of securitisation bonds by far in the Irish market.
Private client
This year, a new category has been introduced, 'Private Client Deal of the Year'. The award goes to the E95 million investment in Airtricity this year.
In June 2006, Airtricity Holdings Limited appointed NCB Corporate Finance and CSFB as advisers to raise E250 million of equity, as due to the firm's successful expansion into Scotland and the USA Airtricity's equity requirements (and valuation) had increased significantly by 2006.
Airtricity actually raised E380 million - a E310 million primary issue and a E75 million secondary placement. NTR and Ecofin, a leading investor in infrastructure focused companies, subscribed for 100 per cent of the new equity being offered, while a small number of new private investors and Impax, a UK based renewable energy fund, subscribed for the E70 million worth of shares offered for sale by the Quinn Group. The total private client investment in the fund-raising was E95 million.
Legal advice came from Arthur Cox, who advised NTR plc, and A&L Goodbody, who advised the Quinn Group, and Ecofin.
Paul White, head of corporate in A&L Goodbody commented on the firm's involvement in the Airtricity deal. He said, 'Ecofin's investment in Airtricity was an exciting, fast moving, and complex deal for a number of reasons. There was a comprehensive existing shareholder and management structure in place with detailed provisions on transfers and allotments of shares which Ecofin had to slot into. The legal work included a fast paced due diligence on Airtricity's wind farms followed by negotiating complex amendments to the existing shareholder arrangements and Articles arising from Ecofin's investment, NTR plc maintaining its 51% stake and the exit by the Quinn Group'.
Andrew Ennis, a director in NCB, says that private client involvement in the deal was beneficial for all parties involved. For the company, it was good because the private client base was flexible in both the amount of shares available for purchase and their willingness to purchase existing shares rather than subscribe for new shares a crucial element in facilitating a successful fundraising, he said, while for promoters/management, continued private client investment has enabled the 'A' shareholder block maintain a significant shareholding (currently 36 per cent) despite the company's significant equity requirements.
For private clients, the return on the deal has been significant says Ennis - NCB clients who invested in 2002 at a price per share of E4.56 have seen the value of their investment increase by 320 per cent in five years.
Project finance
The project to build a road by-passing Limerick city was awarded 'Project Finance Deal of the Year'. The E241 million deal involved an innovative conduit bond financing structure arranged by HBOS, combined with financing of the European Investment Bank, as well as mezzanine and junior finance tranches. It is the first Irish infrastructure project to have been bond financed. A&L Goodbody, McCann FitzGerald and Linklaters provided legal advice on the deal.
Colm Fanning, a partner with McCann Fitzgerald, remarked that the type of bond employed was via HBoS's Conduit structure and was the first PPP project in any sector anywhere to use conduit finance at financial close.
'Previously, it had been used to re-finance projects, once the subject project was sufficiently stable, post-completion. The conduit device is primarily suited to small to medium sized deals with low operational risk. It is seen as a fusion of capital and debt markets, offering something between a bond and loan. Under the Limerick conduit model - the PPP Co issued note directly to a special purpose vehicle, the conduit, which is under the administration of HBOS Treasury Services. This conduit then borrows from the commercial paper market and subsequently lends the proceeds back to the project, when funds are required,' he said.
Ciaran Rogers, A&L Goodbody banking partner and lead partner on the deal, said, 'We are extremely pleased to have acted for the borrower on what is the first capital markets structure used for an Irish infrastructure project financing. The deal was very challenging, not only because it involved an innovative 'first to market' fixed-rate commercial paper backed bond finance structure, but also because of the layering of EIB finance, mezzanine finance and third party equity in the finance structure. All these financing elements had to be moulded to accommodate Irish legal and regulatory constraints, project specific issues and rating agency requirements. In many instances this demanded development of innovative legal and commercial solutions'.
The funds are being used for the design, construction and maintenance of an approximate 10 kilometre tolled dual carriageway bypass to the south west of the city of Limerick, pursuant to a 35 year Public Private Partnership (PPP) project agreement. The four year construction programme includes a 675 metre long immersed tube tunnel under the river Shannon. The scheme is part of the Irish National Roads Authority's Transport 21 Agenda.
The funds were raised by DirectRoute (Limerick) Limited, a special purpose company owned 40 per cent by Strabag AG, an Austrian construction company, 20 per cent by John Sisk & Son, 20 per cent by Lagan Holdings Ltd and 20 per cent by Roadbridge Ltd.
The company raised E143.5 million in a guaranteed secured loan due 2040 from Landale Asset Purchasing Company No 3 Limited and a E97.6 million guaranteed secured loan from the European Investment Bank. Both transactions were rated Aaa by Moody's Investors Services.
The source of repayment for the senior secured debt will be toll payments made by the road users. Senior debt holders are largely insulated from traffic volume through a traffic guarantee mechanism granted by the National Roads Authority. |
