This article appeared in Finance Magazine

Diary of a Deal: alphyra MBO breaks new ground
The MBO of alphyra was one of the most high profile and at times controversial MBOs of the recent genre of public to private transactions.
Much of this stemmed from the fact that management was starting from a relatively low position of ownership at approximately 5 per cent. It was not a €shoo-in€ as has been the case with some other deals and it was the only MBO where a genuine competing bidder had emerged - First Data Corporation (FDC).

What was sometimes lost sight of was that the MBO delivered a quantum increase in shareholder value as the offer represented a 74 per cent premium to the share price on the day prior to the MBO announcement and a 100 per cent premium to the average price for one month prior to that date.

The successful transaction was a landmark deal for the leading US venture capital firm, Benchmark Capital - their first MBO and public to private transaction - and an attractive deal for management and employees who have a total equity interest of approximately 36 per cent, albeit in a more leveraged business. For Key Capital, the new corporate finance partnership founded by Conor Killeen, it was also very gratifying to be involved in making a public offer within their first year in business.

Key Capital first met up with John Nagle to present the idea of a MBO at the end of August 2002. Another international investment bank had also been promoting the idea to John and John Williamson (finance director) but they opted to run with Key Capital as they were very comfortable with their team and they had a preference for having their advisers close to hand. Before the end of September they gave their first presentations to a small group of private equity houses. Benchmark always had a competitive advantage through Barry Maloney and his understanding of the pre-paid cellular market together with his past business relationship with John Nagle.

As they were in the process of completing the legals on the Benchmark deal, the Irish Independent of November 6 ran a story speculating that alphyra was going to be the subject of a MBO approach. Fortunately, Benchmark and the MBO team were sufficiently advanced in their plans that they were able to meet immediately with the advisers to alphyra, Goodbody Corporate Finance (GCF), and agree a holding statement that was released later that day thus ensuring that the proposed offer could be measured against the share price on November 5. By the end of that week the share price had reached e1.95.

For the next few weeks Key Capital engaged in a number of rounds of negotiations with GCF and the independent directors so as to arrive at an offer price that they would be willing to recommend to shareholders. At the same time, together with John Nagle, they met a number of the major institutional shareholders in order to explain the rationale for the offer and to gauge their willingness to sell and if so, at what level. As this process was going on another team within Key Capital worked with John Williamson on raising the necessary bank funding, and IIB Bank were selected as the preferred bank. IIB€s willingness to commit time to understand the business and their short chain of command were significant factors in their favour.

By the beginning of December, the buy-out vehicle, Rendina, was in place and after protracted negotiations with GCF they had settled on an indicative offer price of e2.45 and Rendina was given permission to commence due diligence.

Other potential bidders enter the fray
As Rendina were finalising the terms of their recommended bid, other industry players were starting to take an interest in alphyra. In anticipation that this situation might arise management ensured that all information that was made available to Benchmark as part of their due diligence was assembled in a secure data room so that this same information could also be made available to other bona fide bidders.

Rendina pressed ahead with the announcement of their offer on December 20 and that same morning acquired shares in the market amounting to approximately 6 per cent of the company. Over the holiday period the Rendina team, in particular McCann Fitzgerald, worked on getting the offer document finalised but management were also requested to attend meetings with FDC who had emerged as the most serious potential counter bidder. The independent directors countered press comment that management regarded the FDC approach as hostile and unwelcome with an announcement welcoming the FDC interest and advising shareholders to take no action pending clarification of FDC€s intention. Rendina put its stake in the ground by issuing an announcement confirming that it regarded the FDC approach as hostile and unwelcome. From a distance this must have appeared as a very aggressive stance for management to take.

As the situation with FDC appeared to be heading towards an impasse in that it appeared their preference was to only do a deal with the support of management, talks took place between Rendina and FDC between January 24 and 26 to see if FDC were interested in taking a minority shareholding in Rendina. This appeared to meet some favour with FDC senior executives in the US but the local European management team was less enthusiastic. In any event on January 27, FDC announced an €indicative€ offer of e2.80 per share which was conditional on some further due diligence and FDC board approval. This may have also been an attempt to apply additional pressure on the management team to abandon the MBO and to sign up for a career with FDC. However, yet again the MBO team with the full backing of Benchmark and their advisers did not relent in the face of the prospect of a full FDC bid. Within a few more days, FDC finally decided that they were not going to make a bid and the independent directors confirmed this in announcement to that effect on January 31.

Closing the offer
The first closing date for the Rendina offer was February 6 and it resulted in acceptances of just 34.6 per cent. The low level of acceptances was not a surprise to the Rendina team given the short interlude since FDC€s departure. Equally, they recognised that there was a need to inject some new momentum into the offer and assuage some shareholder concerns that FDC might have paid €2.80 per share. The merit of having financial backers with an ability to make decisions within very compressed timescales was proven when Rendina announced on February 7 that it had increased its offer to e2.70. Even with the increased offer the Rendina bid still faced some challenges. There was press speculation that Euronet, another electronic payments company, were going to make a bid and confirmation that Brendan Murtagh had purchased shares at e2.68 in expectation of a higher bid (although it should be noted that Mr Murtagh had accumulated most of his 3.5 per cent stake at considerably lower prices).

On 19th February alphyra announced their preliminary results for 2002 which were broadly in line with market expectations. This ensured that shareholders had very current information available to them in evaluating the Rendina bid. It also helped that some independent commentators such as Davy Stockbrokers opined that the offer appeared to represent fair value. Notwithstanding this, a number of shareholders were still sitting on the fence notwithstanding the announcement of alphyra€s 2002 preliminary results on February 19 which were broadly in line with market expectations. Some expected that Rendina might further increase its offer so Rendina confirmed on February 20 that the e2.70 offer was final and would not be increased. This confirmation provided the backdrop to Rendina actually buying Brendan Murtagh€s stake and by the second close on February 26, acceptances had increased to 60.7 per cent. Rendina extended the offer period for one further week and by that date the acceptance had increased to 74.5 per cent. Of the shareholders who had not accepted at this stage it was clear that there were a number who would only accept when the offer was declared unconditional, so once the level of acceptances exceeded 75 per cent on March 7, Rendina declared the offer unconditional and within a further week the 80 per cent threshold was passed.

alphyra de-listed from the Irish and London exchanges on April 23
Looking back on this complex and protracted bid, it is clear that the unity of the alphyra management team and the strong support that they had from Benchmark, IIB and their principal advisers, Key Capital and McCann Fitzgerald, were critical success factors. The team also broke new ground in the Irish market in terms of the level of market purchases during an offer period and going unconditional at less than 80 per cent acceptances.
This article appeared in the May 2003 edition of Finance Magazine.