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Strong acquisition growth in 2007 to continue into 2008 driven by domestic deals Back  
The level of merger and acquisition (M&A) activity in Ireland has seen strong growth in 2007, with a number of trade and leveraged deals going through. Alan Doherty argues that the strong basics of the Irish economy will continue to attract investors into 2008, but notes that competition in private equity may drop as the availability of credit shrinks.
It looks like 2007 will be another strong year for mergers and acquisitions (M&A) in the Irish market. Recent survey data shows that the total value of deals in the Irish market in the first nine months of 2007 was €13 billion, up a significant 82 per cent from a value of €7.1 billion in the first nine months of 2006. These transactions can be split into two broad categories - acquisitions by trade players and leveraged deals pursued by financial type buyers and during the year there was significant competition between both types of acquirers for a number of deals. Indeed, the appetite for certain targets was so strong that vendors and their advisers in a number of instances were able to run controlled auctions without granting exclusivity, thereby forcing a number of parties to carry out full due diligence in advance of submitting final bids in order to be compete.

Trade Deals
• Acquisitions of Irish-based companies
In the year-to-date a significant amount of the M&A activity in Ireland has involved Irish companies seeking to consolidate in an effort to acquire scale. There are many examples of such transactions in 2007, some of the more prominent being the acquisition of Emap’s Irish radio network by Communicorp; Quinn Group’s acquisition of BUPA’s Irish health insurance operations; Bord na Mona’s acquisition of AES, an Irish waste management firm; and both Greenstar and Thomas Crosbie Holdings’ bolt-on acquisitions of smaller rivals.

Furthermore, 2007 has seen a number of transactions whereby foreign businesses sought to gain a foothold or expand their presence in the Irish market in their efforts to achieve international scale. Recent transactions of this nature include Lancaster Laboratories’ acquisition of Microchem, the Irish test and research laboratory business; Britvic’s acquisition of C&C’s soft drinks business; Imtech’s acquisition of Suir Engineering, the Irish based provider of automation and electrical instrumentation services; and Premier Foods’ acquisition of Chivers Ireland.

These transactions serve to highlight the continued attractiveness of Ireland as a key investment location due to confidence in the growth prospects of the local market. Indeed, this is despite a wave of recent media reports concerning a weakening in sentiment towards the Irish economy. This confidence is underpinned by solid economic growth forecasts which, while below the exceptional pace of growth experienced in recent years, are still ahead of consensus European and US growth forecasts.

This confidence is further reinforced by the strong performance of Irish corporates, many of whom are continuing to deliver strong earnings growth and guiding robust future performance – for instance, a number of companies across a broad range of sectors including IAWS, Kingspan, Paddy Power, Ryanair and the two main banks, AIB and Bank of Ireland, have recently reported double digit earnings growth, while remaining upbeat about growth prospects.

• Foreign Acquisitions by Irish-based companies
2007 has also witnessed indigenous companies continuing to increase their footprint in foreign territories. Houghton Mifflin Riverdeep Group’s €2.9 billion acquisition of Reed Elsevier’s US educational business is the largest example so far in 2007. CRH is understood to have spent in excess of €1.25 billion on acquisitions in the year to date and, at the time of writing, CRH is in negotiations with Cemex in relation to the purchase of certain assets in the US and Europe, involving a potential spend in excess of €3 billion. Other notable transactions in this space include Ardagh’s acquisition of Rexam’s glass business, Alphyra’s reverse takeover of Cardpoint and McCambrige’s acquisition of Inter Link Foods.

These transactions serve as a reminder of the ambitions of Irish businesses to break into and strengthen their presence in international markets and their success in doing so, despite tough competition from other trade and private equity buyers.

Leveraged Deals
Although in recent years, and prior to the recent credit crunch, private equity firms accounted for up to 20 per cent of global mergers and acquisitions, in Ireland private equity has been involved in relatively few transactions. Nonetheless although there has been limited activity on the part of foreign financial buyers in the year-to-date, we have seen Irish financial buyers become more prevalent with the continued emergence of domestic private equity type players focused on acquisition opportunities across a broad spectrum of sectors. The recent bidding contest for Irish Continental Group is perhaps the most well-publicised potential leveraged transaction in 2007. Other key transactions in the year-to-date include the acquisitions of Kayfoam Woolfson (an Irish manufacturer of mattresses and bedsprings) and the Racing Post by the newly formed FL Partners; the acquisition of the Jurys Inns business by Quinlan Private; TVC Capital’s acquisition of the Comfort Inn and Quality hotel chains; One51’s acquisition of local waste businesses, and Boundary Capital’s buyout of Prontaprint and acquisition of a 45 per cent stake in Arnotts, the department store business.

The emergence of domestic financial buyers has to a large extent been driven by a ‘wall’ of available private capital, some of which represents property-generated wealth which is now seeking to diversify; low real interest rates; and widespread availability of credit. As has been the case for some time many of the opportunities that these players are interested in pursuing are too small for the international private equity groups to focus on. Many of the international private equity houses will only look at deals with a value in excess of €250 million, thereby excluding most of the M&A opportunities that arise in this country. However, at the larger end of the deal spectrum, €500 million plus, private equity interest, be it domestic or international, is in the near term likely to be constrained by tighter credit availability.

Outlook
The Irish corporate finance market activity is set to remain buoyant in 2008 given the relatively strong fundamentals in place. In particular, although going through a steep change, the Irish economy remains a strong performer conducive to investment with above-average forecast economic growth rates. Secondly, many Irish corporates have significant cash resources on their balance sheets and coupled with very strong management teams with strong track records encompassing acquisition-led growth have the ability and desire to pursue further acquisitions. Indeed for those interested in pursuing large scale transactions they should see less competition from private equity in 2008 as the high levels of debt heretofore available to fund these deals is reduced. Moreover at all ends of the market valuations will likely to be somewhat lower than has been the case up until recently reflecting the change in the overall environment. Finally, while the credit crunch will have an impact on M&A, particularly as a result of stricter lending criteria, this is unlikely to significantly impact those medium-sized deals that are most common in the Irish market. As regards the larger deals, while there will be some reassessment and restructuring many of the aggressive ones are likely to be postponed.

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