How the O'Reillys lost battle for INM

Events in the Four Courts this week lifted the lid on the bitter divisions within the boardroom of Independent News Media, publisher of large circulation titles such as the Sunday Independent and the Irish Independent.

And today’s annual meeting in the Citywest Hotel in Dublin could yield further revelations.

Non-executive director Paul Connolly has taken an action in the Commercial Court to have a €1.87 million exit package paid on April 19th to former chief executive Gavin O’Reilly declared unlawful.

Connolly argues the compensation, which amounts to 23 months of remuneration for O’Reilly, was excessive and should have been voted on by shareholders as per company law.

INM disagrees, with chairman James Osborne countering that the payment to O’Reilly avoided potential litigation from the executive and all of the associated legal costs and negative publicity that would have attached to such a move.

Legal advice to INM from McCann FitzGerald suggested the O’Reilly’s package did not require shareholder approval.

Documents filed in relation to the case highlight the many divisions at board level within the company and the roles played in O’Reilly’s demise by its largest shareholders and its lenders, particularly Bank of Ireland.

Osborne took over as chairman in October 2011. He succeeded Brian Hillery, someone the O’Brien side had wanted removed from the post for some time as he was considered too close to the O’Reillys.

Osborne’s appointment came just months after a bitter annual meeting that saw non-executive director Leslie Buckley removed from the board by shareholders.

Buckley had been one of three O’Brien representatives on the board of INM following a restructuring of the board in 2009. As far as the O’Brien side was concerned, Buckley’s removal was orchestrated by the O’Reillys.

Wealthy financier Dermot Desmond joined the O’Brien side in supporting Buckley at the annual meeting.

Rarely in the history of Irish public companies has a non-executive been removed from the board. This act served to strengthen O’Brien’s resolve to remove Gavin O’Reilly from his post and take control of the board.

Osborne’s role over the past eight months or so has been pivotal in all this.

This is not to suggest that he has been a patsy for O’Brien. Quite the opposite.

Osborne took his role as an independent chairman very seriously and earlier this year set about tackling the bubbling discontent with the performance of Gavin O’Reilly.

This involved a serious of meetings with key stakeholders, including O’Brien, Desmond and Bank of Ireland. On March 8th, Osborne made a note of a meeting with O’Brien.

“I explained to D O’Brien that there was no question of him gaining control of INM unless he were to make a successful bid. He said he had no intention of doing this as he had lost €500 million-plus on his investment.”

O’Brien also expressed his concerns about existing management, but “didn’t say anything new”, according to Osborne’s note.

On March 12th, Osborne made a note of a meeting with Desmond, who said he had admired Sir Anthony O’Reilly but felt Gavin O’Reilly was “useless”.

Desmond, who owned 5.75 per cent of INM at this time, told Osborne he would oppose the re-election of the whole board at the annual meeting, before stating that he would definitely vote against O’Reilly and finance director Donal Buggy.

Desmond said he would not support a rights issue with the existing management team in place.

The following day, Osborne made a note of a phone call with Pat Gaynor of Bank of Ireland. “The over-riding view of the bank was that substantial changes to management were required,” Osborne noted. “He said the bank would not officially say this, but that he was authorised to convey this message to me.”

March was to prove a pivotal month for O’Reilly in relation to INM. On March 6th, Osborne sent him a strongly worded three-page letter outlining his concerns about O’Reilly stewardship of the company.

O’Reilly had taken over as chief executive in March 2009, when his father stepped aside as part of the major restructuring agreed with O’Brien and the company’s lenders.

Osborne noted how INM had issued two profit warnings in the past 12 months and how budgets for this year were under pressure.

He also said a number of board members had expressed “concerns” about O’Reilly’s draft paper on Project Resolute, a cost-saving plan aimed at reducing its addressable cost base of €197.6 million.

“What is now required is something far more dramatic,” Osborne said.

He said the company also needed to raise capital, in part to pay for the cost-cutting plan, which was problematic for the company in light of the fact that shareholders and the banks had raised questions about O’Reilly’s stewardship.

“How do you propose to square this circle?” the chairman asked.

Osborne also questioned how O’Reilly’s remuneration was paid to him. This reflected the fact that 70 per cent was paid to a company in Jersey and 30 per cent to an Irish registered entity. This was a highly unusual arrangement.

“I believe this matter needs to be thoroughly reviewed,” Osborne said.

O’Reilly lived in London with his family and travelled to South Africa and Australia to conduct business on behalf of INM.

A witness statement from company secretary Andrew Donagher shows that O’Reilly spent 103 and 73 working days in Ireland in 2010 and 2011 respectively.

When in Dublin, O’Reilly used hotels, including the Four Seasons, at the company’s expense, although he had recently begun renting an apartment here.

This led Osborne to question his expenses, which amounted to €120,325 from August 15th to December 31st. He also questioned whether O’Reilly’s chairmanship of Australian media group APN, in which INM has a near 30 per cent stake, was a good use of his time, given the travel commitments involved (11 trips down under in 2011).

Six days later, O’Reilly sent a 14-page reply to Osborne rejecting the various criticisms and taking issue with the tone of the chairman’s correspondence.

He also argued that the €75.5 million operating profit achieved in 2011 was within the €74 million-€78 million range agreed by the board last November.

Minutes from the board meeting of March 21st highlight the difficult trading conditions that INM is experiencing.

In Ireland, advertising is currently 9 per cent behind last year. “The 2012 budget assumes advertising would be down 4 per cent for the year,” it added. A “net exposure” of €1 million was expected, the minutes show.

The minutes also noted that Investec, which owns about 6 per cent of the company, had advised that they intended to sell their shares as they were dissatisfied with the performance of the company and didn’t see the share price returning to 58 cent.

On March 28th, Osborne sent an email to his fellow directors asking the following question: “Do you believe that Gavin O’Reilly’s position as chief executive of INM should be terminated with immediate effect by giving proper notice or payment in lieu thereof?” He wanted a straight yes or no from his fellow directors.

In his witness statement in the litigation with Connolly, Osborne said that by that point, he was “firmly of the view that the best interests of INM required that the issues around the CEO’s tenure be resolved by his removal”.

O’Reilly did not take this lying down. In a note prepared for him in April and outlining the parameters of his severance, Osborne is characterised as not being “principled or trustworthy” in his dealings with O’Reilly, and as not having conducted himself in a manner consistent with “good corporate governance”.

O’Reilly reserved his right to litigation to protect his interests.

The severance terms laid out as being acceptable to O’Reilly amounted to €3.33 million. This reflected one year’s notice and two years’ severance and included compensation relating to his chairmanship of APN in Australia.

In addition, the company would be expected to pay O’Reilly’s legal and tax advisers’ fees, estimated at €50,000.

This did not include a payment to “make whole” his pension obligations. This could have involved a payment of €2.25 million.

In the end, O’Reilly agreed a severance of €1.87 million, plus €97,000 in adviser fees.

This package was agreed with O’Reilly on the weekend of April 14th and 15th.

A board meeting was called for April 19th to give effect to his termination.

While supporting O’Reilly’s exit, Connolly and Lucy Gaffney, O’Brien’s other representative on the board, voted against the size of his severance.

Connolly’s legal action, which is due to wrap up in court today, was prompted by the outcome of that board meeting. The directors voted 7-2 in favour of the severance for O’Reilly.

The events of recent months have their origin in O’Brien’s emergence on the share register of the company in early 2006 and his subsequent very public rows with Sir Anthony O’Reilly and his son Gavin.

O’Brien and Sir Anthony had been rivals for the second mobile phone licence in the late 1990s, which O’Brien’s Esat won. Sir Anthony’s Valentia consortium beat O’Brien in a race to buy Eircom almost a decade ago.

O’Brien was the new kid on the block, making money from technology, while O’Reilly was seen as the suave old-stager who had made his money from traditional enterprises.

When O’Brien began buying INM shares, the company was worth €1.7 billion and had the safest dividend policy in town. Today, it has a market value of just €143 million.

Having traded at just above €17 a share in 2007, stock is now valued at 26 cent a pop.

The change in fortunes is largely the result of the global financial crash and the economic downturn in the western world, which has squeezed the company’s profits, particularly in Ireland and South Africa.

Under Sir Anthony’s stewardship, INM became a highly leveraged company.

In 2009, it was forced by its lenders into a humiliating restructuring when it couldn’t afford to repay a €200 million bond.

Sir Anthony O’Reilly and Denis O’Brien had their shareholdings slashed.

While O’Reilly, who also dropped many millions of euro on his investment in Waterford Wedgwood, has remained stuck on 14 per cent, O’Brien has continued to buy shares in the company, becoming the largest shareholder with a stake of just under 30 per cent.

This is the maximum he can hold without making a bid for the entire business, which seems unlikely in the near future.

Where does INM go from here?

Further cost-cutting has taken place of late, with new chief executive Vincent Crowley formalising a comprehensive plan for the group.

Capital raising is a possibility, while tricky negotiations on its €423 million in debts, which needs to be restructured by 2014, will have to be completed.

The board also needs renewal. Baroness Margaret Jay, Bengt Braun and Lothar Lanz have all exited stage left.

Finance director Donal Buggy and Osborne will be in the firing line at today’s meeting.

It has taken several years and cost him more than €500 million, but O’Brien is finally in the box seat at INM.

After nearly 40 years in charge, the O’Reillys have lost control of the business.

Whatever direction INM takes from here, it will almost certainly be directed by him.