Brexit may give Stock Exchange its tie-up ‘compelling reason’

It took 221 years for founding stockbroker members of the Irish Stock Exchange (ISE) to break open the bourse's awkward, limited-by-guarantee corporate structure and divvy out a €27.5 million windfall among themselves.

Just three years after the deal, they’re contemplating something altogether more lucrative: a potential sale of the entire business.

The Irish Times first reported last month that ISE – which prized its independence as most other players in the industry in Europe and the United States were caught up in a flurry of deals over the past 15 years – was on the lookout for another exchange with which to join forces.

Private-equity news service PE Hub followed up almost two weeks ago with a report that the exchange had hired New York-based investment bank Moelis & Co to find a buyer.

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Few questions seem to have left ISE chief executive Deirdre Somers more exasperated over the years than being asked by reporters when the exchange would finally allow itself to participate in industry-wide consolidation.

Asked the question by this newspaper last year, she retorted that “being bought is not a strategy” and that she had “yet to see a compelling reason” why the ISE would want to merge with – in all probability – a much larger rival.

Somers has repeatedly argued that the financial “ecosystems” – comprising brokers, analysts and advisers – in capital cities across Europe have been decimated when their local stock exchanges have been taken over by a large foreign operator. With Davy and Goodbody Stockbrokers holding almost two-thirds of the ISE stock between them, it’s understandable why they would not be supporters of such a strategy.

However, Brexit potentially changes everything. The Dublin exchange could be a defensive bet for the London Stock Exchange (LSE) or an offensive move for another operator as they contemplate the UK's departure from the European Union.

The ISE and the LSE have similar listing and corporate governance rules, both operate in common-law jurisdictions and benefit from sharing a language and time zone.

A European exchange – such as Deutsche Börse, whose third attempt this century to merge with the LSE was blocked by the EU in March – may see the Dublin bourse as an ideal route to lure business from London as a result of Brexit. (Deutsche Börse, after all, has had a long-standing alliance with the ISE as a provider of the stock trading system to Dublin.)

The LSE, on the other hand, could see Dublin as place for its companies to carry a dual listing, with stock prospectuses approved by Irish authorities as there’s a big question about whether UK-issued prospectuses will continue to be recognised across the EU following Brexit.

Either way, both types of potential buyer would have very strong reasons to keep a meaningful exchange operation in Dublin. It could offer a real platform for growth beyond the ISE’s current niche as a leading international venue for the listing of debt and funds.

Partnering would help the ISE deal with increasingly complex and costly EU legislation – such as the Markets in Financial Instruments Directive II which comes into force next year.

As for the price of an outright sale, the best clue is in the recently-filed accounts of one of its shareholders, Cantor Fitzgerald Ireland. The value it has placed on its 8.4 per cent stake suggests suitors should start off at €110 million.

Smurfit’s cost for sticking with Venezuela tops €1bn

While a raft of international businesses have retreated from Venezuela in the past few years amid mounting social and political unrest – including General Motors, Cadbury's parent Mondelez and United Airlines – Ireland's Smurfit Kappa insists it is going nowhere.

However, the box-making giant revealed this week in its third-quarter report that the cost of sticking it out in South America’s once-richest country – where it has operated for three decades – has topped €1 billion.

That’s what the company, led by chief executive Tony Smurfit, estimates to be the cumulative loss on its net investment in Venezuela over the years when translated back into euro.

With Venezuela battling with a deep recession against the backdrop of a slump in oil prices since 2014 and the impact of years of economic mismanagement, the International Monetary Fund last month forecast its current world-beating 653 per cent rate of inflation will surge to more than 2,300 per cent next year.

Venezuela's 10-year government bonds were trading at an already deeply discounted rate of 50c on the dollar before US slapped sanctions on the country in August as it denounced the country's president, Nicolas Maduro, as a "dictator". Speculation over whether Caracas would default on a bond payments in recent weeks sent them to as low as 34c, though they have since recovered to about 38c.

Smurfit Kappa's chief financial officer, Ken Bowles, told The Irish Times this week that Venezuela, where the company employs 1,900 people, "remains very much part of our portfolio," even though it accounts for only about 2 per cent of group earnings and requires a lot of technical explanation in its quarterly accounts.

The Venezuelan business is justifying its existence as an exporter of a type of containerboard used for cardboard boxes, known as kraftliner, which is in very short supply globally. But could Smurfit Kappa’s patience with Venezuela eventually run out?