Corporate activity to spike as key Brexit transaction window opens
A glance at the newspaper headlines on Brexit and US-China trade relations could lead one to believe that 2019 was a year of treading water for Irish corporates, with perhaps a lukewarm outlook for 2020, pending resolution of factors outside our control. However, a look at the key indicators shows a strong and improving undercurrent of corporate activity, with the added tailwind of an expected spike in London's initial public offering (IPO) market before the next Brexit cliff-edge stand-off.
The ISEQ posted a gain of more than 30pc in 2019, with most of this achieved in the last quarter, led, in the main, by share price growth in CRH (55pc) and Kerry (46pc).
This momentum reflected the changing mood of global financial markets and a growing sense that the threat of a hard landing for the world economy had dissipated.
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Similarly, a number of ISEQ stocks that are highly exposed to the Irish macro-economic cycle and have been closely tied to sterling-euro benefited from the so-called 'Boris bounce'. AIB, Bank of Ireland, Glenveagh, Cairn and Dalata all finished the year strongly, as markets began to take a more optimistic view of Brexit on foot of the Conservative majority in the December UK election.
One disappointment for the Irish market for listed shares was losing four names from Euronext Dublin, while only gaining one. Each of the departures (Green Reit, INM, IFG and C&C) had their own and very differing reasons.
For C&C, it was yet another case of a successful Irish business outgrowing its domestic market, so much so that the size of its British business may offer certain benefits of a UK-only listing.
In one of the toughest IPO markets for some time, Uniphar (suppeorted by Davy) achieved its listing ambitions.
Since its public listing in June, this diversified healthcare services organisation has gone on to announce a series of acquisitions, underpinning market appetite and scope for earnings-accretive corporate activity. Encouragingly and despite volatile markets, Uniphar continues to trade above its IPO price, demonstrating that public markets can and do provide an attractive source of capital for ambitious, growth-focused Irish management teams.
Following in the footsteps of Greencoat, Applegreen and Dalata, the Uniphar IPO again shows how a rising tide lifts all boats, with the proceeds providing fire power and an impetus to undertake acquisitions and investments that have a favourable knock-on effect on the rest of the Irish corporate market.
Good momentum for private companies
Private company merger and acquisition (M&A) and fundraising activity remained strong in 2019, broadly in line with the volumes seen in 2018.
In part, this is being driven by the continued low interest rate environment, supporting favourable exit valuations, and availability of finance for consolidation opportunities and international acquisitions.
Private equity-backed M&A continues to grow year-on-year, both in absolute and relative terms, reflecting strong momentum from the Irish-focused funds and increasing interest in Irish private companies from UK and European-focused funds. From a sectoral perspective, technology and financial services saw the greatest levels of activity. Notable within the technology space were a number of post-venture companies undertaking fundraisings in the tens of millions, whereas a number of years ago, they may have sold out instead. Within financial services, there continues to be increasing M&A within insurance broking, wealth and pensions.
For some time now, international strategic acquirers have actively pursued consolidation opportunities associated with Irish private companies, and 2019 was no different.
Examples include the acquisition of Irish-owned STS Group, a provider of electrical engineering and instrumentation services, by Germany's Dussmann Group; Spanish coffee company Cafento acquiring a majority stake in Java Republic; and Australian payments company EML buying Prepaid Financial Services.
Last year also saw an increasing diversity in the sources of debt capital being provided in the private corporate sector.
While the pillar banks continue to account for most of the market, each end of the risk curve has seen increasing activity, from the likes of the European Investment Bank at the lower-rate end, under longer terms, to a number of active players in the venture capital and unitranche space. The latter, typically combining senior and subordinated debt into one blended interest rate, is mostly aimed at middle-market companies and used by private equity in leveraged buyouts.
2020 M&A outlook
The outlook for corporate activity in 2020 remains strong, with potential for even more activity, particularly within sectors expected to benefit from a strengthened pound and greater government spending in the UK.
Potential beneficiaries from increased economic activity and improving sentiment in the UK include the agri-food and building products sectors, where we anticipate further consolidation opportunities.
Looking to public markets, the first half of 2020 looks set to be a busy period for IPOs in the London market, as participants seek to capitalise on this key window before the possibility of another cliff-edge Brexit stand-off at the end of the transition period in December this year.
Expect a busy start to this year for Irish corporates.
- John Lydon is head of corporate at Davy, 2019 Mergermarket Financial Adviser of the Year (Ireland)
Sunday Indo Business