Buying up here for quick profit or for long-term gain?
ANALYSIS:Financiers, investors and hedge funds are moving in while prices here remain low, writes BARRY O'HALLORAN
The bad news that we have been hearing for the last three years is, apparently, the equivalent of putting an “Everything Must Go!” sign on businesses and properties and is luring in those who are keen to make a quick killing by picking them up on the cheap.
Of course, like all hearsay, it’s not really accurate, but it does contain a grain of truth.
Last month, British corporate financier David Nabarro picked up a 21 per cent stake in McInerney, the listed housebuilder that has been under court protection from its creditors since last autumn. Its shares have not been traded publicly since late 2010.
Nabarro is understood to have acquired them as a result of the unwinding of Seán Quinn’s contracts for difference in the group. He wants to sack the existing board and replace it with himself and two colleagues and recover value for shareholders.
In February, the €42 billion private equity fund Apollo hired former Bank of Ireland chief Brian Goggin to help it find distressed assets in the Republic. Late last year, Scotchstone bought into Irish Life Permanent when it looked like the best of a bad bunch of Irish banks.
Hedge funds, including Appaloosa Management, which profit from betting on risks that most others would not, have recently emerged as owners of Bank of Ireland bonds.
Risky investments such as nearly-broke banks and properties that nobody can access credit to buy are not the only thing on their radar. Buyers are just as interested in profitable businesses and, although no one will say it on the record, ever since economist Colm McCarthy recommended the partial privatisation of State companies such as the ESB and An Bord Gáis, a number of investors are said to have run the rule over that sector as well.
However, advisers say that these examples paint anything but a clear picture of corporate activity or interest in the Republic. This is stepping up, partly because assets here are a lot cheaper than they were four or five years ago and partly because there is some recognition that beyond all the bad news, there are good reasons to invest here.
Staff at State agency Nama are known to be talking to about 50 potential investors a week. Corporate financiers, insolvency practitioners and lawyers are seeing more people interested in doing deals here, mainly from abroad, although some may have a connection with the Republic or some experience of it.
Luke Charleton, a partner with Ernst Young’s Dublin office, who specialises in insolvency and corporate finance and restructuring, says these investors are a wide mix of people. Some are serious investors, while others are just kicking tyres in the hope of finding a bargain or two.
Mark Ward, mergers and acquisitions specialist with law firm AL Goodbody, agrees that activity has noticeably stepped up, but says it is all down to international investors. The homegrown players, who were very much a feature of deals during the boom, are virtually absent for obvious reasons.
He says he is working on a number of possible deals involving buyers from the Far East, Europe and Britain. These involve Irish businesses that are trading and solvent, not what have become known as distressed assets. “We are seeing very little of that,” he says.
Both Charleton and Ward say that serious investors are drawn here primarily by the standard and well- known strengths of the Republic – an English-speaking and well-educated workforce, low corporation tax, part of the EU and euro, links with the US and so on.
Ward’s colleague David Baxter, an insolvency specialist, argues that these factors are allied to something more fundamental – there are plenty of people and businesses in the world with cash that has to be invested.
“There is a lot of money out there that needs to be put to work and there are few enough places to do that, so they will zero in on where they think there is value,” he says.
So how do you tell the value-seekers with the long-term view from the carpetbaggers? Charleton says that splitting the two is a question of doing your research before meeting them and ensuring that the credentials they present match up to the reality.
The serious players tend to fit the categories you would expect – private equity funds, sovereign wealth funds from the Middle East, Asian investors and high-net worth individuals. They are interested in businesses, often in, or connected to, sectors such as pharmaceuticals or technology, which are generally, but not necessarily, doing business outside Ireland.
But no matter how serious, there is no question that they are looking for value.
“People want to buy something because they believe they can get a return from it,” Charleton points out. He adds that buying equity in something is not normally cheap, although it is cheaper in the Republic than it has been in the recent past.
It is also clear that some potential buyers have an exaggerated idea of the value available here. Nama, which mainly owns the debts owed by property developers, does also control the underlying assets in cases where it has appointed receivers. While it is talking to a lot of interested parties, it has yet to do any deals on the back of these negotiations.
This is because the agency is finding that buyers’ expectations are unrealistic and it is having to tell people to come back with more serious offers.
Doing a deal involves matching up the expectations of both buyers and sellers. Ward explains that the transactions in which he is involved are likely to come about as a result of an auction or some other sort of process. That means buyers may well have to increase what they initially hoped to pay, while sellers may well have to accept less than they initially hoped to receive.
Charleton agrees that common sense plays a big role. Ultimately, something is worth what one party is willing to pay and the other is willing to accept.
“High quality investors will pay what they believe is a fair price,” he says. “If you can afford to wait for a better price, well, then that’s what you should probably do.”
WHO ARE THE COMPANIES:
This shareholder, opposed to the nationalisation of Irish Life Permanent, bought into the banking and life assurance group last autumn.
It bought into the bank before this year’s stress tests found that it needed about €4 billion to meet capital requirements. At that time, despite exposure to the Irish mortgage market, it looked like the best of the three finance institutions listed on the Dublin market.
The picture has changed markedly since then. On September 30th last, the bank closed at €1.39 and was worth about €380 million. It closed at 2.9 cents on Wednesday of this week, and was worth about €8 million.
One of the private equity group’s fund managers, Piotr Skoczylas, describes it as a “value investor”, that is, it identifies businesses and assets that it believes may be underpriced and potentially offer long-term returns.
Scotchstone is registered in Malta, with a limited liability partnership based in London. The fund is essentially made up of a group of companies and investors.
Alongside Skoczylas, the other principals are Amit Mehra and Gaurav Mehta. It focuses on four areas: financial services, renewable energy, technology and media and general industries.
Skoczylas says it is actively considering going to court to halt the nationalisation of Irish Life Permanent, which he says is an expropriation of shareholders’ property by the State.
He argues that the move is contrary to the Constitution, company law and EU law, and says that Scotchstone will take the case to Europe if necessary.
Efforts to have the bank call an extraordinary general meeting of shareholders have been rebuffed, but Irish Life Permanent intends calling such a meeting itself this month.
Another recent arrival who wants an egm showdown with a board is David Nabarro, a British corporate financier who acquired 21.45 per cent of house builder McInerney plc last May. This came as a result of the unwinding of Seán Quinn’s contracts for difference in the company.
McInerney’s Irish business, which owes its banks €113 million, is waiting to see if the Supreme Court approves a rescue plan that has already been rejected by the High Court. The plan revolves around a €48 million investment by Oaktree Capital, which includes a €25 million settlement with the banks. Its British operations are in administration.
Nabarro wants to sack the board and replace it with himself and two colleagues, Kevin Lynch and John Garratt. He believes it should be possible to simply halt the Supreme Court process, although the case has been heard, do a deal with the banks and recover some value for shareholders.
Nabarro was co-founder and managing partner of the firm Nabarro Wells, which the London Stock Exchange fined £250,000 sterling and censured in 2007.
The firm was a nominated adviser to an Alternative Investment Market-listed shell, Langbar, which misled the markets about the whereabouts of cash that was apparently being held on its behalf in a Brazilian bank.
Nabarro Wells had no part in the fraud and was taken in, along with Langbar’s auditors and brokers. The authorities fined it for not carrying out sufficient due diligence into the companies that it was advising.
Nabarro’s efforts to requisition an egm have been delayed; instead, he is inviting shareholders to a general informal meeting at Bewley’s Hotel later this month, to discuss their options.
The US hedge fund recently emerged as one of a group that hold about €500 million in Bank of Ireland subordinated bonds, on which the bank is trying to get investors to take an 90 per cent discount in an effort to get them to share some of the recapitalisation burden.
A number of weeks ago, it was reported that Appaloosa, York Capital Management and a number of others were planning to challenge the bank’s move in the British courts. They were arguing against taking the discount and were instead offering to underwrite a rights issue by the bank.
New Jersey-based Appaloosa is the brainchild of US businessman David Tepper, who was a credit analyst in a previous life. The fund is backed by its own employees, high net worth individuals and financial institutions.
It invests in distressed and even bankrupt companies, “the diciest of businesses”, according to one observer. It generally buys into such businesses through the bond or equity markets. It made about €5 billion in profits in 2009.
Last year, it made a $1.3 million settlement with the US markets regulator, the Securities and Exchange Commission, for minor violations of short selling rules.
Appaloosa had short-sold Wells Fargo shares for between $33.74 and $34.67 and soon afterwards subscribed for new shares in the bank at $27. It did not use the new equities to cover its short position.
APOLLO and OAKTREE
There are a number of other potential buyers waiting in the wings or actively searching for assets.
Apollo, a private equity fund whose targets include distressed businesses, hired former Bank of Ireland chief executive Brian Goggin earlier this year to help it find such assets in the Republic.
Oaktree, the fund that is hoping to take a significant stake in McInerney if the courts give its rescue plan the green light, is a $50 billion fund which has a division that invests in distressed or debt-laden businesses and works with management to restore value.
* This article was amended on Friday, July 8th, 2011