Davy’s crisis-triggered sale delivers windfall for staff – and the once-powerful G5

Cash coming from deals has surprised on the upside, according to insiders

Davy: fined €4.13m for breaching market rules in relation to a transaction involving the broker’s own staff.  Photo: Sasko Lazarov/Rollingnews.ie

Davy: fined €4.13m for breaching market rules in relation to a transaction involving the broker’s own staff. Photo: Sasko Lazarov/Rollingnews.ie

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When the Central Bank revealed on the afternoon of Tuesday, March 2nd, that it had fined Davy €4.1 million in relation to a controversial 2014 bond trade, the top brass in the State’s largest stockbroking group resorted to an old playbook: lie low and brazen it out.

The regulator concluded that Davy had breached market rules by failing to identify whether a conflict of interest existed as 16 staff bought junior bonds in Anglo Irish Bank, in liquidation at the time, from a client, Northern Ireland developer Patrick Kearney, without disclosing that they were the buyers.

It also found that Davy had kept its own compliance officials in the dark on the deal. Perhaps even more egregiously, the bank said that Davy “provided vague and misleading details and wilfully withheld information” when details of the transaction emerged in the public domain.

It was only after the regulator started a formal investigation that the bank got a true picture and realised that Davy had “presented information in such a way as to make the involvement of certain individuals appear more central to the transaction than in fact was the case”.

Instead of issuing a public statement at the time of the fine and reprimand, then chief executive Brian McKiernan sent an email to staff, saying that while “there were significant shortcomings in how the transaction was conducted”, there had been “no findings of actual conflict of interest or customer loss”.

He would be forced by the Central Bank later that evening to reissue the memo, retracting the reference to “no findings of actual conflict of interest or customer loss”.

The Irish Times reported the following morning that McKiernan was among the 16, alongside then deputy chairman Kyran McLoughlin, then head of bonds Barry Nangle, former chief executive Tony Garry and one-time head of institutional equities David Smith. The five were known internally as the G5.

Davy bowed to Government pressure on the Wednesday afternoon to make a public statement, apologising “unreservedly and unequivocally” for its failings and promising that it would take “appropriate action”.

Within five days McKiernan, McLaughlin and Barry Nangle had resigned, the National Treasury Management Agency (NTMA) had stripped the firm of its ability to act as a primary dealer of Irish Governments, and Davy had taken the previously-unthinkable step of closing down its bond desk.

But it was becoming increasingly clear that even more drastic steps needed to be taken to build a firewall around the business, and address the inconvenient reality – for remaining staff and clients alike – that the once-powerful G5 continued to own about a third of the group.

For sale

At 8:41pm on March 11th, the embattled stockbroker issued a brief, two-line press release confirming that it had put itself up for sale and that Rothschild would be handing the process.

Initial interested parties included Swiss private bank Julius Baer, Cantor Fitzgerald, which acquired Irish stockbroker Dolmen in 2012, Irish unit of UK wealth manager Brewin Dolphin, and UK investment house Permira, backer of UK-based wealth management and professional services firm Tilney Smith & Williamson.

US private equity firm Carlyle and Irish group Melior Equity Partners were also among runners and riders that put in an offer in an early round of bidding and Irish Life and Investec flirted with the possibility of putting in a joint proposal. US financial services giant Stifel was said to be in the chase.

But Bank of Ireland, which previously owned Davy and had made an initial approach even before the for-sale sign was hoisted, was widely seen from the outset as the most likely buyer. It had made it clear that it would keep the firm’s core capital markets business and wealth management units intact.

It was of little surprise when it emerged earlier this month that Bank of Ireland, led by chief executive Francesca McDonagh, was in exclusive talks on Davy. However, it was not known until late last week that Davy’s fund management and servicing unit, Davy Group Fund Management (DGFM), was set to be sold separately.

Sources told The Irish Times at the time that this transaction would amount to more than €70 million. Davy said on Thursday morning that Luxembourg-based investor services group IQ-EQ has agreed to buy DGFM, but did not disclose the price. Davy also revealed that it was selling its 63 per cent stake in Rize ETF, a UK-based exchange traded funds business, for €19 million.

Meanwhile, Bank of Ireland confirmed that it has reached a deal to buy Davy’s core capital markets and wealth management businesses for an enterprise value of €440 million, plus the possibility of up to €40 million of further payments from 2025, subject to the performance of the business.

Earmarked

Sources said that the €40 million has been earmarked for remaining employees, most of whom are shareholders, and not former staff.

The bank will also pay a further €125 million for excess cash on Davy’s books by the time its purchase is completed next year, subject to Central Bank and the Competition and Consumer Protection Commission. The cash will be driven by proceeds from the DGFM and Rize ETF transactions, which are set to complete beforehand.

McKiernan, who remains chairman of Ailmount Investments, the ultimate holding company above Davy, told shareholders – both past and present employees of the firm – on Thursday in an email that they will be left with €540 million from the transactions.

While the value in Davy’s wealth management business was widely acknowledged – even by rivals – the cash coming from the DGFM and Rize ETF deals has surprised on the upside, according to insiders.

McKiernan, as 13 per cent shareholder, stands to receive €70.2 million as the cash is handed out. The other four members of the G5 will get €108 million.

More than a third of the shares are in the hands of about 700 of Davy’s remaining staff.

Many of these only became shareholders in 2018 when the firm issued €5,000 of shares to each employee as a way of divvying up some of the cash received for its stake in the Irish Stock Exchange as the bourse operator taken over by Euronext. Those Davy shares are now worth €12,000 to the holders.

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