Partners taking Arnotts into new territory

Richard Nesbitt's partnership with Niall McFadden of Boundary Capital has really stirred things up at Arnotts, writes Barry O'Halloran.

Arnotts chairman Richard Nesbitt is reportedly fond of telling how his great grandfather, Alexander, walked from the family farm in Co Antrim to begin an apprenticeship at the Dublin department store.

Hard work, and presumably good fortune, saw Alexander Nesbitt rise to the top at the company and ensured that his family didn't just run the business, it also became its longest-standing shareholder.

You get the feeling that Niall McFadden, executive chairman of Boundary Capital, which is soon to become Arnotts' newest shareholder, feels a degree of empathy with Alexander Nesbitt.

While he didn't start out digging turnips in Antrim, he's still come a long way since he started doing business with Richard Nesbitt and Arnotts almost five years ago.

He's had a bit of good fortune too. The door opened for Boundary Capital just two weeks ago when Arnotts' other long-standing shareholder, the O'Connor family, sold their 24.57 per cent holding to Nesbitt for over €40 million in a move that ended an internal dispute.

This week, McFadden indicated that this gave Boundary the chance to come in, and both recapitalise the €40 million-plus spent by Richard Nesbitt - he personally paid for the O'Connor stake - and boost Arnotts' own coffers.

Boundary, in which McFadden is a 50 per cent shareholder with his partners, Declan Cassidy and Martin Cole, will have 28 per cent of Arnotts in return for €40 million. Anglo Irish Bank will hold 17 per cent in return for investing €25 million. The Nesbitt family, led by barrister and company chairman Richard, will hold 55 per cent.

McFadden made no secret of the fact that he was pleased with Boundary's good fortune. And it's unlikely that he expected things would turn out this way when he and Richard Nesbitt sat down for lunch one Saturday almost five years ago to discuss buying out the then Arnotts plc and converting it to a private company owned by the Nesbitts and the O'Connors.

At that point, McFadden's career had taken him from the Goodman meat processing empire to Tedcastles' fuels group and on to Hibernian Venture Capital.

When he met Nesbitt, he was fresh from advising on the $376 million management buyout of another listed company, technology player Riverdeep. The Arnotts chairman, a practising barrister, was looking around for an adviser, and a mutual acquaintance recommended McFadden and Boundary to him.

They hit it off. Partly because McFadden was happy to do business on a Saturday, but largely because, as Nesbitt recalls, he was able to identify key issues facing the transaction before they had to be pointed out to him.

It was the start of a beautiful business friendship. Once Arnotts went private, McFadden was appointed to its board. He took over as chair of its property committee and things started to motor, albeit in a direction that nobody expected.

Instead of offloading some assets, as most predicted, the department store group began buying them. First it purchased the old Independent Newspapers HQ, close to the flagship store on Dublin's Abbey Street. Then it plunged for a property portfolio belonging to Royal and Sun Alliance on Henry Street, also adjacent to Arnotts.

It was clear that McFadden was driving this, but very much with the support of his chairman. The O'Connors, and it emerged this week, some of the 800 workers, were beginning to worry that Arnotts was turning into a property developer instead of a retailer.

In some ways they weren't far off. McFadden and Nesbitt had a plan, which is now called the Northern Quarter. This calls for a wholesale redevelopment of an area bounded by O'Connell, Henry and Abbey streets into a 1.65 million square foot, mixed-used town centre with apartments, shops, a hotel, restaurants, cafes and bars.

It will cost €750 million to complete. Arnotts will own 80 per cent of it, and its development partner, British group Centros Miller, will hold 20 per cent. The concept hangs on two simple pegs: the area has the room to grow, which the competing Grafton Street shopping hub does not; and, most importantly, a lot of people go shopping around Henry Street.

And we mean a lot. Some 15,000 people an hour pass along O'Connell Street/Henry Street, which makes it the busiest in Europe, even busier than London's Oxford Street. Better still, this footfall, as it's known in the industry, has a high conversion rate.

This means that a large proportion of passersby buy something. In other words, if you walk along Henry Street, that's footfall, if you drop into Arnotts and buy socks, that's conversion.

The project's official spokespeople do not have the actual rate, but Nesbitt indicated this week that it was over half, which is high by industry standards.

None of this has allayed fears expressed by some about Arnotts' future. This week, Linda Tanham, an official with retail union Mandate, which has 800 members in Arnotts, said many of them are worried that retailing is going to play second fiddle to property development. She is meeting management to put these concerns to them.

Arnotts says it is hiring Centros Miller precisely because it has expertise in managing the redevelopment of town centres, so thus, the department store group can focus on running its business (which will include an expanded flagship store).

At the same time, it says Northern Quarter will be a separate company, so should the project fail, the core business will be protected. McFadden and Nesbitt are directors of Northern Quarter.

Not that either man is contemplating failure. With all shareholders now behind the project, and the planning permission falling into place, it's all systems go for construction to begin next year, and an opening set for 2012. It's from that point on that Nesbitt and McFadden will be proved right or wrong. Presumably, the acid test will be when someone walks from Antrim just to go shopping there.