Business Irish

Tuesday 20 February 2018

Eurozone crisis won't spell the end for takeovers and sales in Ireland

Companies are cautious about spending their money in this climate but they're not backing off completely, just biding their time

IT was about seven o'clock on a Friday evening almost three weeks ago when the news began to break. Insurance bosses gathered at an industry function were among those first to get a sniff of it but, within an hour, the word was out.

The €1bn deal to sell Irish Life had collapsed at the eleventh hour, the life insurer's Canadian bidder Great West spooked by the escalating sense of chaos at crisis across the eurozone.

This was not to be an isolated event. Days later, Singapore-based STT announced it was abandoning a mooted restructuring for Eircom "due to macro-economic concerns over the wider eurozone".

And earlier this week, ready-made food giant Greencore told shareholders it had ended talks with a potential acquirer because of the "current dislocation" in global markets -- a euphemism for eurozone strife.

Less than three weeks and billions worth of Irish deals have been snuffed out, leaving us with a €1bn bill to recapitalise Irish Life & Permanent, a chronically underinvested Eircom and some pretty hacked-off Greencore shareholders.

Not to mention the €2bn or so state assets we're hoping to offload as part of 'New Era', a task that looks more than a little daunting against the recent trinity of deal misses.

As the eurozone lurched from controlled chaos to outright chaos, the prospect of further pain for our banks and our economy has been foremost in the minds of most.

But have we been looking in the wrong direction? Could it be that the most tangible impact of the crisis is the death of mergers, acquisitions, IPOs and anything else that could allow the transfer for business ownership in a normal, healthy way?

One man who doesn't think so is Kennedy Wilson boss William McMorrow, aka the guy who brought Bank of Ireland's €1.1bn saviour investors together and recently led a deal to buy $1.8bn (€1.3bn) of the bank's UK commercial loan book.

"For Europe right now, I have a belief in human beings that when it comes down to it they will make good decisions," he says.

Mr McMorrow and his partners have already invested about $3.5bn in Irish assets -- crisis or no crisis, Mr McMorrow says he sees that "continuing", adding that his firm and fellow investors are "very keen to look at operating businesses" as well as pursuing further deals in finance and real estate.

"We're very pleased with how things have turned out in Ireland," he says. "Big things have happened on the banking front, Ireland has taken the hard medicine on austerity and the country is head and shoulders above the rest of the periphery."

He admits, however, that while the eurozone crisis doesn't temper people's interest in doing deals in Ireland, it does impose practical limitations on some buyers.

"It's definitely more difficult to finance transactions at certain leverage points," he says, adding that even if you believe the eurozone will work things out and Ireland is a good play, you still have to convince your bank to part with the cash.

It's a point echoed by several corporate finance executives, even the more bullish ones. "You'll see deals done below the €100m level, things that companies can finance themselves," says one executive. "But once you get into the €300m, €400m, or the €1bn level, then it becomes very, very tricky."

A report released by Boston Consulting Group and UBS yesterday found that companies had built up record cash balances to finance acquisitions and that they needed deals more than ever to stimulate growth.

But having a war chest of cash doesn't mean M&A will get done, according to Alexander Roos, a partner and managing director with Boston Consulting's Berlin office, who co-authored the report.

"Some transactions may be possible without leverage," he says. "But would you really want to bet all your cash on M&A in this environment, or would you want to keep some as a cushion in case it gets cold in the winter?"

Even companies that are able to sell bonds in "completely unreliable" capital markets are more inclined to salt it away for a rainy day than splash out on acquisitions, he says, while other companies are constrained by the fact that flooding the banks with liquidity doesn't generate real lending.

Another unfortunate truth is that not every investor shares Mr McMorrow's faith that the eurozone crisis will have a benign ending -- and even those that do say volatility is a deterrent.

Mr Roos says companies are "extremely nervous" about the broader eurozone environment and he sees the crisis's outcome as a "key driver" of whether next year will be a good year for European M&A or another sluggish one.

Corporate finances executives seem united in the view that there's a prudence to adopting a 'wait and see' stance, regardless of how you think the eurozone gyrations are going to play out.

"If the euro does break up, or something goes horribly wrong, it's not as if it wasn't foreseen," says one source.

"You don't want to be the one going to your board saying, 'we'd heard about all the risks, we didn't believe it and now it's all blown up'.

"It could all be sorted in six months, what's the harm in waiting?"

Acting now could also place a foreign buyer at the wrong end of a currency play -- $1bn could be worth a lot more euro in six months' time than it's worth now.

Waiting is a particularly safe bet when pretty much everyone else is waiting too, so the chances of someone else swooping on your prized acquisition are pretty limited.

Then there's what the eurozone chaos does to the pricing of a deal.

"Even if you don't believe the euro is going to collapse or anything bad is going to happen, you still have to price in that risk premium," says a senior executive at an Irish branch of a major international company.

"That makes it harder to get a price through to your board that a seller will accept."

That is precisely the dilemma the State found itself in with Irish Life. They could have gotten a deal away -- there were three bidders still in the fray when things went south -- but the risk premium could have dragged it to firesale pricing.

"The uncertainty means 'sellers' don't sell unless they have to," says Jon Moulton, the boss of London-based Better Capital, who's best known on this side of the Irish Sea for snapping up Calyx.

For the record, Mr Moulton also believes that the eurozone calamities are "not a big deal" for Irish M&A.

"Change of currency is less of a concern than weak economies," he says. "I suspect Ireland would be better off with a proper default than the long, slow and painful approach forced on it by being in the eurozone."

Mr McMorrow, though not advocating leaving the eurozone, believes Ireland could remain attractive outside the single currency, while Mr Roos says Ireland is now seen as being "in between" the troubled periphery and the healthier countries.

Nonetheless, there are significant fears about Ireland's fate in a post-eurozone world.

Richard Curran, partner with law firm LK Shields, points out that some international buyers see an acquisition in Ireland as a "foothold into the euro" -- a selling point we clearly couldn't claim if we left the single currency.

A corporate finance boss describes Ireland's defection from the euro as a "huge concern" for anyone looking at buying a business here, particularly given the significant uncertainty about how a euro break-up would actually happen.

While those concerns are undoubtedly very real, there are those who question whether the eurozone backdrop is entirely to blame for the trio of recent deal collapses.

Heavily indebted Eircom has always attracted scant interest when it came on the market, and the dynamics of the company would present significant challenges to any suitor.

Greencore and its would-be buyer are believed to have parted ways over price -- a not uncommon occurrence. And any bidder taking on Irish Life would have been taking as much of a punt on the Irish economy as on the eurozone outcomes.

"When a deal collapses, you very rarely know why unless you're involved," says Mr Curran. "People might cite the eurozone as a reason for not going ahead with a deal -- it certainly wouldn't help -- but there could be other factors at play."

The good news is that even if tomorrow's much-hyped summit doesn't deliver a definitive solution to the eurozone crisis, the severity of the situation means that action will come soon.

For Ireland, this means that by the time New Era's report has been completed, submitted to Cabinet and adopted, the worst of the crisis should have passed and a new, 'normal' M&A markets should have resumed.

The other good news is that most people expect buyers to hang around long enough to find out -- the deluge of private equity and other would-be buyers who flocked to Ireland when the crisis first hit has slowed, but there's still a steady flow.

"It's not like you have money burning a hole in your pocket that you have to spend before a tax deadline," says one source.

"If you're interested in an Irish life insurance company now, you're going to be interested in six months' time, you're not going to run off and spend the money on an Asian power company instead.

"If anything, the hope is that there would be more bidders."

In other words, the crisis has interrupted M&A activity in Ireland, not killed it off.

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