Davy bids top €475m as post-scandal review continues

Bank of Ireland widely seen as most likely buyer of breacher of market rules

Davy stockbrokers was fined €4.13 million for breaching market rules in relation to a transaction involving the broker’s own staff. Photograph  Sasko Lazarov

Davy stockbrokers was fined €4.13 million for breaching market rules in relation to a transaction involving the broker’s own staff. Photograph Sasko Lazarov

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Bidding for Davy has topped €475 million, far outstripping estimates of the stockbroking and wealth management firm’s value before it was rocked by a bond-deal scandal, according to sources.

Six suitors are said to remain in the running for the business, including Bank of Ireland, US financial services giant Stifel, and Tilney Smith & Williamson, a UK-based wealth management and professional services company backed by private equity firm Permira. Bids include Davy’s estimated €65 million of excess balance sheet cash.

Brian McKiernan, Davy’s largest shareholder and former chief executive, who was part of the so-called Davy 16 involved in a 2014 bond deal that was the subject of a Central Bank of Ireland fine in March, stands to receive almost €62 million for his 13 per cent stake in the firm under a deal worth €475 million.

Four other former senior figures who were key players in the 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, are understood to own a further 20 per cent combined.

Personal borrowings

However, the net proceeds from a sale will depend on the level of debt contained in holding companies above the Davy operating business as well as personal borrowings of individuals.

The largest securities firm in the State put itself up for sale in March in an effort to rebuild trust in the business and address concerns about former executives involved in the 2014 bond deal remaining as major shareholders. Investment bank Rothchild is handling the process.

The Central Bank fined Davy €4.1 million that month, saying it breached market rules by 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. The regulator also found that Davy kept its own compliance officials in the dark on the deal.

Davy has hired Alvarez & Marsal, an international professional services firm, to look forensically at staff trading over the past seven years as part of a review of matters arising from a Central Bank investigation. The outcome of the review is not expected before final bids are submitted in June.

Potential liabilities

A buyer is likely to protect itself from potential issues emerging in future through standard warranties and by holding back a certain amount of the consideration for a period.

It could also insist on the sellers signing a letter highlighting potential liabilities that, if not disclosed, would reduce final payments on the deal.

While Davy’s prized wealth management business, with €16.5 billion of assets under management, attracted dozens of expressions of interest, the firm has made it clear that it is selling that business and its capital markets unit as one. However, sources have said that Davy is open to selling its third-party fund services unit separately.

Davy was estimated by industry sources to be worth between €350 million and €400 million prior the scandal. Bids were expected to come in at a discount to that range.

The Irish Times revealed Bank of Ireland, which is widely seen as the most likely buyer, had made an initial approach for Davy in early March, prior to the firm being put up for sale, and reported last month on the interest of Stifel, whose wealth management business has almost $360 billion of assets under management and which also owns investment bank Keefe, Bruyette & Woods (KBW). The Sunday Times reported over the weekend that Tilney Smith & Williamson and a consortium of private equity firms were also in the running.