Deal or no deal
Commerical law: Mergers and acquisition activity is a good indicator of economic health. Robin Morton takes a look at the big deals on the scoresheet
It’s not often that business deals create a political storm but one clear exception is the proposed £1bn takeover of Northern Ireland Electricity by the Republic’s ESB.
Even though NIE is currently owned by Arcapita, a Bahrain-based investment company, the fact that it is set to come under the control of a semi-state body from the Republic caused sparks to fly.
Despite Unionist protests, the deal for the Belfast-based company, which runs the electricity transmission and distribution business in Northern Ireland, is expected to be completed by the end of the year, once the Competition Authority in the Republic approves the takeover.
Business is business, after all, and the fact that such a massive deal is in the offing is one bright light amid somewhat restrained times on the mergers and acquisitions (M&A) front in Northern Ireland.
At present, the level of activity in the M&A market is depressed, and this is regarded as another key indicator of the impact the recession is having on Northern Ireland.
According to Experian, the British-based global information services company, the rate of business takeovers in Northern Ireland is down quarter on quarter and year on year.
Wendy Smith, business development manager at Experian’s Corpfin division, said only six transactions were announced in the third quarter of this year, down from 13 in the second three months of 2010 and a reduction on the 11 recorded for the third quarter of last year.
She said that in the Republic, M&A activity had also declined, with 49 transactions recorded in the third quarter of this year compared with 57 in the second quarter.
In the UK as a whole, Experian reports that the number of transactions for the third quarter was down by 22% year on year to 859, but the total value of the deals rose by 45% to £59bn.
In Northern Ireland, one so-called “mid-market” deal confirmed in July was — in common with the ESB/NIE deal — also on the energy front.
This is the £99m acquisition of Ballylumford Power Station at Islandmagee by AES, the American company which already owns Kilroot power station.
Questions were raised as to whether this deal would give AES too strong a stake in the generating market in Northern Ireland, given that the combined operation would hold 64% of available generating capacity within the province’s grid.
Consents have to be secured from the Utility Regulator and the Department of Enterprise, but this is expected to be a done deal by the end of the year.
More recently, a Californian company called Kana Software said it had signed a “definitive agreement” to take over Belfast-based Lagan Technologies in a deal worth more than £29m.
Lagan, one of Northern Ireland’s fastest growing software companies, was founded in 1994 and is a privately owned business backed by institutional and private investors.
Slightly smaller in scale, but still significant, was the £4.03m acquisition by Cambridge-based CSR plc of broadcasting equipment specialist Belfast-based APTx Licensing Ltd, which was announced in July.
Neasa Quigley, corporate partner at Belfast legal practice Carson McDowell, said most of the M&A activity that was taking place at present hinged on funding sources such as private equity or access to public markets.
She said: “So far, the M&A market has been challenging in 2010 and we expect 2011 to continue along the same lines.
“There doesn’t seem to be any great appetite among the banks for funding M&A activity at the minute, but companies with substantial war chests or access to private equity are in a position to mount takeover bids.
“M&A activity is a key economic indicator of economic wellbeing, but at present there is a lot of nervousness and a general lack of confidence.
“The general economic climate is a significant contributory factor, while Northern Ireland’s reliance on exposure to the public sector makes it vulnerable to proposed spending cuts. In our experience, clients with an existing export market are weathering the recession better than others and some sectors such as food and IT are performing well.”
Ms Quigley said that at present banks were heavily involved in internal business reviews of clients, and significant legal work was arising from that activity and from work related to NAMA, the Republic’s National Assets Management Agency — known as the “bad bank”.
She added: “Renewable energy and clean tech projects are still attractive propositions to banks and the private equity market and we are starting to see some activity in this area.”
Aidan Langan of Belfast-based Enterprise Equity, said private equity was key to encouraging more M&A activity to take place in Northern Ireland.
He said: “The Northern Ireland economy is dominated by small firms and this has a fundamental effect on productivity — both in terms of missing out on the efficiencies that go with scale but also on the quality and depth of management that it is possible to afford within small firms.
“The quickest way to address this issue is to encourage more M&A activity within the existing base of companies.
“In my view, private equity has a major role to play in facilitating this.”
Ian Coulter, managing partner of the corporate department at Tughans solicitors in Belfast, said that private equity had been the key in unlocking several recent M&A deals.
His practice is involved in the ESB/NIE acquisition, and also acted in the Kana Software takeover of Lagan Technologies as well as the CSR/APTx deal.
He said: “It’s a bit of a mixed bag at present and there is no doubt confidence has taken a bit of a blow.
“But we have been involved in some high-profile transactions, most notably the NIE deal.
“Interest remains strong in certain sectors, such as technology, where Northern Ireland companies are held in high standing.
“There is a lot of activity in the agri-food sector, too.
“But for the most part, it is companies which have a strong balance sheet which are leading the way.
“The banks are cautious at present, which means that 60% is probably the upper limit for leverage, where once you could have counted on at least 80% or 90%.”
John George Willis, head of the corporate team at Tughans, said the ESB takeover of NIE was the largest corporate deal to have taken place in Northern Ireland for some years.
And he said there were signs of confidence and pointed to the sale of Damolly Retail Park in Newry by local property company Corbo to Metric Property Investments, a deal worth £34.9 million which completed in June.
He said: “It was significant that this recently formed London-based property company chose Northern Ireland as the location for its first major acquisition.”
So, with the ESB takeover of NIE raising the stakes, M&A activity still has an important part to play in the Northern Ireland economy. And time will tell whether bigger is always better.