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M&A Activity – What’s the Deal?

Corporate M&A partner at Matheson,  David Fitzgibbon shared  insights with The Lawyer magazine on current M&A activity in Ireland and the outlook for 2021 in light of Brexit and the current COVID-19 pandemic.

Below are some themes David discussed with The Lawyer:

Q: What is driving activity in Ireland right now?

A: Deal activity is primarily being driven by well-capitalised international corporate buyers and private equity (PE) sponsors (or PE-backed portfolio companies undertaking bolt-on transactions).  In fact, the number of PE transactions undertaken in the first half of 2020  represented the highest half-yearly volume in Ireland in the past seven years.  The continued push for digitalisation across various industries is also driving activity.  We would expect this trend to continue over the second half of the year and beyond.  We would also expect the number of corporate carve-outs and distressed deals to increase as the systemic state supports which have been put in place since the onset of the pandemic begin to be withdrawn.

Q: Are you expecting banks to be more cautious as lenders?

A: In the current climate, banks are more cautious in their lending criteria in relation to certain sectors — for example, retail and hospitality — as they are mindful of the borrowers' ability to make repayments.  However, lending criteria in relation to other sectors, including, real estate and TMT, have not been affected to the same extent.

There appears to be a willingness from Irish banks to work with their borrowers to create longer-term solutions to their credit needs and their ability to make repayments.  It is expected this will continue, although clearly certain loans exposed to some of the more severely hit sectors will require significant restructuring.

The Irish government recognises that a stable supply of credit is essential to ensure the liquidity demands of viable enterprises are met and has taken steps to ensure the ongoing availability of credit to such enterprises.  This has included the introduction of the Covid-19 Credit Guarantee Scheme (CCGS), which was recently introduced to encourage additional lending to SMEs by offering a partial state guarantee (currently 80%) to lenders against losses on qualifying loans to eligible SMEs.

Q: What will impact activity over the latter half of 2020 / 21?

A: While valuation challenges will remain, particularly in circumstances where the pandemic persists for a prolonged period, the possibility of lower EBITDA multiples and a less competitive deal environment, driven by certain potential corporate buyers focusing less on strategic M&A and more on their core business activities, will together ensure that transactions will continue to occur.  Similarly, the gradual withdrawal of the wide-ranging state supports, which have been given to businesses in the last six months, is likely to accelerate corporate carve-outs and distressed sales as liquidity and cash-flow issues come to the fore.  This will lead to opportunistic transactions where good business experiencing short-term cash-flow problems will be acquired at attractive valuations.

Brexit has the capacity to impact activity, however, the nature and scope of that activity will be influenced by the terms (if any) of any deal between the UK and the EU.  This is a variable which will have to be watched carefully and has the potential for material unforeseen consequences on transactional activity.  From that perspective, we continue to work closely with clients in relation to Brexit and its potential impact on their business and legal needs, supported by Matheson's Brexit advisory group, which comprises a range of corporate lawyers from a number of the firm's practice areas.

The full article 'Changes To The M&A Landscape' was recently published in October issue of The Lawyer Magazine.