Goodbody, its suitor AIB and Ireland Inc need Davy to find good home

Market Beat:

 

AIB chief executive Colin Hunt has been something of a lone wolf among Irish bankers, on the prowl for deals in recent times.

An economist by background, he was key to AIB’s acquisition of a controlling stake in consumer payments firm Payzone in 2019, the bank’s first sizeable purchase since the financial crisis, cemented six weeks after he was promoted to the top job that March.

When it emerged last September that Ulster Bank was thinking seriously about quitting the market, he assembled a team to approach the lender’s UK parent, NatWest – leaving it in the position where it is now poised to take over €4 billion of Ulster’s prized corporate and SME loan book.

Deposits

In an era when lower-for-longer rates, muted loan demand, and surplus customer deposits are putting the squeeze on interest margins, Hunt is seeking to add to the bank’s non-interest income by setting up a life and pensions joint venture with Irish Life parent Great-West Lifeco, and, as confirmed earlier this month, repurchasing Goodbody Stockbrokers, his old alma mater, subject to regulatory approval.

The timing of the €138 million Goodbody deal couldn’t have been more fortuitous for Hunt – announced the same afternoon as the stockbrokerage’s larger arch-rival Davy was landed with a €4.1 million Central Bank fine and reprimand for breaches of market rules on a 2014 bond trade involving 16 staff. The ensuing crisis has resulted in Davy, which has bought 11 businesses in the past decade to add to its might, now finding itself on the block.

It’s a far cry from when Davy head honchos on Dawson Street looked on with amusement and opportunism in mind as Goodbody found itself being hawked around in recent years by Fexco, the Kerry financial services group. (Fexco bought a controlling stake in the business a decade ago as AIB was forced to sell off certain assets under an EU restructuring plan tied to its bailout.)

Within months of a deal to sell Goodbody to a Chinese consortium, led by Zhong Ze Culture Investment Holdings, falling through in early 2019, it emerged that Davy was in talks with Fexco to snap up its smaller peer.

This sent shivers down up the spines of those working in the Ballsbridge firm, who rightly feared the obvious synergies.

Irish Life was also circling Goodbody at the time, but it was only interested in the steady income wealth and asset management side of the business and not the capital markets operation, where fees from stock trading and advising on mergers and acquisitions (M&A), stock market flotations and placings are more volatile and cyclical.

Deal

It says something about the mindset in Goodbody – where management and certain staff own 49 per cent of the business – that a deal in late 2019 to sell the business to another Chinese suitor, Bank of China, was seen as the best option, given the execution and bedding-in risks involved.

The Beijing-based bank would walk away last June, citing uncertainty caused by Covid-19.

Davy types privately ridiculed the notion of AIB buying back Goodbody after it emerged late last year that talks were on.

The argument was that the bailed-out bank should be conserving its cash to deal with the fallout from Covid-19 and that the Republic would be doing well to have one strong stockbroker able to compete with overseas investment banks and boutique UK brokers such as Numis Securities and Shore Capital. These have been snapping up gigs advising publicly quoted Irish companies in recent times and account for much of the trading volume in Irish stocks.

But if the Irish stock market is to survive, it needs at least two local brokers. Even as things stand, limited analyst coverage of many smaller stocks listed on Euronext Dublin means that there is limited trading in them – making it very difficult to establish proper prices.

Having only one player in town to turn to for a company looking at an initial public offering (IPO) or share placing to grow – or, indeed, a Government seeking to sell assets – is a dangerous thing. And having only one real institutional equities desk in Dublin would lead, ultimately, to the demise of the market.

With Rothschild, the international investment bank hired to find suitors for Davy, set to issue a teaser document in the coming weeks, most of the interested parties would only be piqued by the wealth management and private clients business.

Profit

This is said to account for about two-thirds of the firm’s estimated pretax profit of more than €40 million last year, before bonuses, and an even greater proportion of the group’s estimated €400 million value before the recent scandal.

Very few of those circling, outside of Bank of Ireland and, perhaps, Cantor Fitzgerald Ireland, would be interested in Davy’s capital markets as well as its wealth units.

Of course, a capital markets business could stand on its own. But it would not have the same strength and standing in the eyes of parties it deals with.

It goes without saying that the work of an independent firm, Alvarez & Marsal, that has been hired to conduct a review of matters arising from the Central Bank investigation and look forensically at Davy staff trading over the past seven years will be key to re-establishing trust.

But as much as Hunt, the one-time chief economist at Goodbody, may be amused by Davy’s woes in recent times, he must know that if Goodbody is to thrive, it needs a strong competitor to maintain a market. The same goes for Ireland Inc.

Still, with more than 70 per cent of Davy’s shares in the hands of one-time employees – and over 33 per cent alone held by five former executives that were involved in the ill-conceived 2014 bond deal – not everyone’s interest are aligned.

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