Davy, the stockbroking and wealth-management firm, has agreed to sell its assets for as much as €605 million in three deals, as it seeks to draw a line under the biggest crisis in its 95-year history.
Bank of Ireland confirmed on Thursday that it has it has reached a deal to buy Davy's core capital markets and wealth management businesses for an enterprise value of €440 million, with the possibility of up to €40 million of further payments from 2025, subject to the performance of the business.
Sources said that the €40 million has been earmarked for remaining employees, most of whom are shareholders, and not former staff.
The bank will pay a further €125 million for excess cash on Davy's books. A large portion of this will come from the agreed sale, also announced on Thursday, of Davy Global Fund Management (DGFM), the company's fund servicing and fund management arm, to Luxembourg-based peer IQ-EQ.
Sources had previously told The Irish Times that this part of the business was worth more than €70 million. The cash pile will also include €19 million that Davy is set to receive from the separate sale of its 63 per cent stake in Rize ETF, a UK-based exchange traded funds business.
Davy put itself on the market in March as the firm grappled with the fallout from a €4.1 million Central Bank fine relating to a bond trade dating back to 2014. Davy was found to be in breach of market rules for failing to identify whether a conflict of interest existed as 16 employees bought junior bonds in Anglo Irish Bank from a client in November 2014 without disclosing that they were the buyers. Davy kept its own compliance officials in the dark on the deal.
McKiernan biggest beneficiary
Davy’s former chief executive, Brian McKiernan, who resigned in March as it emerged he was part of the so-called Davy 16, will be the biggest beneficiary from the much-higher-than-expected proceeds from the sale of the firm’s assets. He is the largest shareholder, with a 13 per cent stake.
Mr McKiernan, who remains chairman of the ultimate holding company above Davy, told shareholders in an email that the net proceeds for them will amount to as much as €540 million, according to sources. However, €110 million of this will only be paid by Bank of Ireland in 2024, subject to Davy shareholders “meeting a number of agreed criteria”.
Four other former senior figures who were key players in the Davy 16 trade – one-time chief executive Tony Garry; former deputy chairman Kyran McLaughlin; erstwhile head of institutional equities David Smith; and ex-head of bonds Barry Nangle – own 20 per cent of of the firm combined.
More than a third of the business is in the hands of about 700 of Davy’s 800-strong workforce, according to sources. Some 83 of these are employed by DGFM.
The Department of Finance confirmed that Davy employees will continue to benefit from the firm's variable-pay structure that allows bonuses. Some 80 Bank of Ireland staff will also transfer to Davy by the end of 2022, allowing them to benefit from a similar pay arrangement, even as bonuses remain banked across bailed-out Irish banks. A similar arrangement has been agreed as part of AIB's planned takeover of Goodbody Stockbrokers, announced in March.
A quarter of the €440 million initial consideration Bank of Ireland has agreed to pay will be held back for two years after the deal is expected to be completed, in 2022. This will only be paid out subject to Davy shareholders “meeting a number of agreed criteria”.
Staff trading review
Davy also hired Alvarez & Marsal (A&M), an international professional services firm, in March to look forensically at staff trading over the past seven years as part of a review of matters arising from a Central Bank investigation.
A&M "did not identify any instances of staff dealing that were either similar (in their characteristics) to the transaction which gave rise to the fine or otherwise resulted in crystallised harm or detriment" to Davy clients, according to key findings from the report, also released on Thursday.
However, it did identify instances of personal staff dealing in relation “to a very small number of high-value transactions that displayed signs of potentially higher conflict of interest risk”.
“In none of these transactions did they identify in their investigation any serious concern as to a conflict of interest or client detriment,” it said. “However, A&M found that not all of these were subject to adequate (or adequately documented) review at the time.”
Bank of Ireland previously owned Davy, but the broker’s management bought it out in 2006 in a debt-laden deal that valued the business at about €350 million.
Davy has paid back debt at pace over the past decade, even as it spent millions on 11 acquisitions, focused mainly on building up its valuable wealth management and private clients business.