Decision time approaches for IWP shareholders

Opinion: The decision by the shareholders of IWP, the cosmetics and toiletries group, to agree to venture capital creditors taking over the company represents a sad day for Irish entrepreneurship, writes Bill Murdoch

Coming from a humble Limerick-based screw and nuts firm, IWP became a diverse home products company with interests in the UK and mainland Europe, under the leadership of Joe Moran who last week was called to give evidence before the Mahon tribunal.

At one stage IWP, which was set up in 1935 and became public in 1985, appeared to have all the credentials to join the ranks of the restless domestic brigade making its mark here and elsewhere. It should have been another Grafton Group or Kingspan. Instead, creditors are getting 90 per cent control of the company for a mere €55 million.

While the shareholders have agreed to the restructuring, effectively giving creditors control, they have until May 2nd to accept or reject the new substantially diluted shares, or to accept a token 3.5 cent per share. That sends shivers among shareholders who saw the shares at 32 cent two years ago and a management buyout offer of 44 cent turned down by the board last year. The 3,000 shareholders should take note that, if they do nothing, their shares will be automatically acquired at 3.5 cent per share. If they reject, they will be left in limbo with the existing shares.

Joe Moran (along with his fellow directors) has agreed to accept the cash in respect of his 11 million shares. However, the other shareholders should not necessarily be guided by this as the directors were forced by the venture capitalists to give irrevocable acceptances.

So what should shareholders do? They would be unwise to object as this would leave them in no man's land. If they need the cash, they should accept the cash offer. Alternatively they can take partial cash and the rest in new shares.

Those prepared to give it a whirl would need to mentally write off the investment as there are no short-term benefits, and plenty of pitfalls. And as minority shareholders with little rights and with no market in their shares - unless they make a market among themselves - they would have no obvious way out.

However, the venture capitalists (the largest is Strategic Value Partners from Delaware, which will hold 46.8 per cent, but this could rise above 50 per cent) are, in effect, going in at 3.5 cent per share, and they will need a return in the normal three to five-year period. Regrettably the restructuring document voted on by shareholders last week contains no up-to-date pro-forma data, so it is not possible to see the group's starting financial position after the conversion of €55 million of the €120 million debt into new equity.

While the restructuring is effectively a takeover, which would have required a pro-forma statement, the regulators instead considered it a restructuring, thereby avoiding that need.

In any event, full restructuring plans have not yet been finalised. What we know is that IWP starts with secured debt of €65 million which will have to be wiped out before there is any chance of a return. Looking at IWP's latest results, the required cash flow is unlikely to come from its trading ability. Excluding exceptional charges, the group barely kept its head above water at operating level - operating expenses absorbed nearly all the gross profit in the six months to September 30th 2005 - and it still had to meet interest payments.

There will have to be a big asset disposal programme and this is clear from the restructuring agreement. On Alex Sorokin, a partner in Kroll Talbot Hughes who is charged with the restructuring, it says: "The amount of the success fee has not yet been finalised and will be based on realisations obtained from certain disposals as measured against benchmarks that are yet to be agreed."

Its only domestic operation is its head office in Fitzwilliam Square, Dublin, where eight people are employed. It has already announced that this is to be moved to Skelmersdale, Lancashire. Elsewhere it employs 1,600 people, mostly in the UK.

The focus for disposals could well be in the UK. An obvious sale would be its 35 per cent stake in Jeyes, which has annual sales of more than €250 million. IWP had lent this company more than €40 million (including accrued interest) in 2004/05 and there is bound to be pressure to realise this.

The other shareholders in Jeyes are the management, with a 21 per cent holding, and Legal General Venture Fund, with a 44 per cent holding. That venture investment has been running for more than three years so it must be nearing its cash-in time.

Other UK operations include Constance Carroll, Fine Fragances and Burlington Gifts. The financial knife is likely to be directed at these. But the UK operations are quite small, with annual sales of about €80 million in the last results to March 31st 2005.

The mainland European operations are much larger, with sales of more than €100 million. These include Royal Sanders, a toiletries group based in the Netherlands, and Polbita, a polish group with 25 retail outlets. With Poland in the EU this could well be beefed up and/or sold.

A relaunch of IWP as a quoted concern would be the ideal outturn for existing IWP shareholders, but that possibility must be less than 50 per cent. Venture capitalists are finding it easier, and less messy, to sell off assets and/or shares, especially if they are tax efficient.

Hopefully enough IWP shareholders accept the share offer so that they can have a representative on the board. This is triggered if holders of 33.33 per cent or more of the existing ordinary shares elect to take the new ordinary shares through the cash-out option. Then an additional director, Brian Kearney, a management consultant, and non-executive director and chairman of the old IWP audit committee, will be reappointed to the board following the redemption date.