Brexit: An M&A risk or opportunity for the Irish mid-market?
Anya Cummins, Partner, Corporate Finance discusses how Brexit could affect M&A in Ireland.
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.
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. 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 upsides for Irish businesses to capitalise on Brexit through well-chosen M&A activity.
Specifically 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 the 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 which 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 29% 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, although 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 over the last number of 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 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.
This article first appeared in the Sunday Independent.