Tuesday 25 October 2016

Apocalypse now? If not now, when?

Last week's Brexit vote sparked the most cataclysmic global economic event since the 2008 financial crisis. With Britain's major political parties torn at the seams, uncertainty - that bane of the markets - is set to endure as the UK scrambles to establish a plan for negotiating with the European partners from whom its people have decided to part. Our sector-by-sector analysis of the fallout for Ireland features experts in energy, pensions, trade, and agribusiness. But first, Anya Cummins of Deloitte examines the outlook on the M&A front

Anya Cummins

Published 03/07/2016 | 02:30

Are we facing economic annihilation, or is the climate merely uncertain?
Are we facing economic annihilation, or is the climate merely uncertain?

Economic uncertainty typically reduces the level of mergers and acquisitions (M&A) activity in an economy. As corporates pause to assess the outcome of the UK Brexit vote, a slowdown in M&A for the rest of 2016 is the general market expectation.

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This comes after a period of healthy activity: there was significant growth in M&A activity in 2015 driven by a combination of attractive Irish corporates and the availability of capital.

Anya Cummins of Deloitte
Anya Cummins of Deloitte

However, uncertainty typically leads to confidence reducing and decisions being deferred, which may result in M&A activity overall slowing down over the remainder of this year. With uncertainty comes opportunity, and there are also potential up sides for Irish businesses to capitalise on Brexit through well-chosen M&A activity.

Domestic M&A activity in which both buyer and seller are Irish should not be significantly impacted, particularly where neither party is overly dependent on the UK for its underlying trade.

The Irish funding environment is very strong, and there are a number of active private equity buyers driving deal activity in the domestic market.

We expect that this activity will continue at pace, as has already been demonstrated with Cardinal Carlyle's announced acquisition of AA Ireland this week.

Consolidation has also been an important feature of the Irish market across a range of sectors. Well-capitalised Irish corporates are likely to continue to bolt on strategic acquisition targets, both in Ireland and internationally, to drive their growth plans.

One of the key risk areas is the impact of Brexit on the underlying earnings and, therefore, the valuations of Irish businesses that may be considering a sale. We have already seen significant declines in public stocks and currencies since the Brexit result last week, and it is reasonable to assume that the valuations of some privately-held companies have also been impacted. Deal multiples are therefore likely to fall too, and this may cause corporates to hold off on sale until there is further clarity on the post-Brexit economic climate.

The specific impact of Brexit on the valuation of any Irish business considering a sale depends on a number of factors.

In particular, the level of UK exposure of the business will come under increased scrutiny, and some sectors that are traditionally major drivers of M&A in Ireland, such as the heavily export-dependent food sector, are by definition more exposed in this regard.

In contrast, other sectors such as technology, media and telecommunications (TMT), which in 2015 represented 29pc of Irish M&A activity by volume, should prove more resilient.

Irish businesses with less dependence on the UK market may also become more attractive to international acquirers, including some purchasers who had been originally looking to the UK for acquisition targets.

Post-Brexit, the UK private equity (PE) market also continues to view Ireland as an attractive investment hub, though currency fluctuations may impact on appetite and valuations. While PE leverage multiples may decline in the face of Brexit, highly- levered deals have not been a prominent feature of the Irish market and, as such, this is unlikely to impact significantly in an Irish context.

With regards to outbound M&A opportunities in other countries for Irish corporates, the UK market has clearly become a less attractive investment location. Prices paid for UK-owned businesses have been particularly high for several years, and perhaps will now reduce to more stable levels.

This creates opportunities for acquisitive Irish corporates with a higher risk appetite and a strategic rationale for UK market investment. A significant proportion of Irish outbound M&A by well-capitalised and diversified Irish corporates has been in the US, Asia and Europe, and this activity shouldn't be significantly impacted.

It will take some time for the overall impact of Brexit on M&A for Irish businesses to become clear, and the impact is entirely dependent on the underlying activities and capital structure of any particular business, the sector within which they operate and the international nature of their business.

An uncertain economic climate generally correlates with a slowdown in activity overall, but opportunities should emerge for both buyers and sellers in the Irish market.

Anya Cummins is a Partner, Corporate Finance, Deloitte

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