Daily M&A: Rethinking Irish Banks As Buyout Targets (AIB, IRE, BKU, BX)

Something happened in recent weeks which was easy to miss out on and easy to have forgotten about, but which Irish bank investors need to consider.  Other geopolitical news has taken over.  Wilbur Ross has recently been talking up the state of Ireland and the opportunity that exists there.  Yep, the same country that just had elections and is going through a massive restructuring to make sure it does not implode.  With the turmoil in the Middle East and Northern Africa and with the fresh downgrades from ratings agencies in the Lands of the PIIGS, thinking about the opportunities in Ireland is rather far from the minds of most U.S. investors.  So, let’s actually consider what merger and acquisition opportunities could exist in the great green country of Ireland.

The only two public banks (or more like quasi-public government agencies) that U.S. investors know about are Allied Irish Banks plc (NYSE: AIB) and Bank of Ireland (NYSE: IRE).  There are also Anglo Irish, Irish Nationwide, Irish Life & Permanent, and others.  Effectively, all have been wards of the state and have been given considerable government assistance that was relatively speaking much more than what the U.S. banks were given as a whole in our own bailout.

Here is the issue… These very bruised Irish banks are likely still going to need help from above via the European Central Bank despite what appeared to be lower borrowings in February. The drop could arguably even be given a drunkard’s case that February was just a shorter month than January.   With EU and IMF help, the ECB is likely next.  What if these flailing institutions got help from the private sector?

Wilbur Ross and his private equity groups have so far preferred to buy bankruptcy bank deals.  BankUnited, Inc. (NYSE: BKU) here in the United States is now public again and it was purchased by Ross, The Blackstone Group LP (NYSE: BX), Carlyle and friends before it recently came public again.  Ross and Carlyle purchased Educational Building Society, or ESB, from the Irish government already and in recent weeks Mr. Ross was calling for what he believes will be a V-shaped recovery after the pain plays out in Ireland.  If this is correct, the Ross or other private equity investors from the U.S. and in Europe may want to consider taking some of these banks off of the Irish government’s hands if they can prove to adequately offer a clean-up and turnaround process that will involve job-savings and taxpayer-savings.  AIB has recently warned that further restructuring will entail more job losses.

Does this new thought process imply that any of these are imminent buyout candidates? Absolutely not.  Could any of these be buyout candidates or at least see more asset sales under certain circumstances?  This is a more complicated “yes” in simple terms.  Any buyer would be actually buying a shell of the old banks and getting assistance may be easier for a group that already has deep pockets and a solid risk management plan that can be implemented in the years ahead.  Any buyer also might be able to get these for a song when you consider that much of the woes in Ireland are directly tied to the current and future burdens of carrying these banks.

Finding buyers would be no easy task as the opinion of the day is that some of the underlying assets may in fact be no better than black holes.  Can you imagine the answer after private equity and turnaround artists would give after they hear “OK, now keep an open mind for a second.  How would you feel about buying an Irish bank?”

We have one mantra here at 24/7 Wall Street.  Never buy an asset solely because you think someone else might acquire it at a higher price.  Buying any securities of any asset class should be bought based solely upon their own merits and assuming the risks each investor is willing to take rather than based on the greater fool theory.  As always, know what you are really investing in.

JON C. OGG