Opinion Bill MurdochWhen the Wimbledon tennis season commences, on June 20th, the financially troubled Waterford Wedgwood group which is experiencing very severe trading conditions, will hold another extraordinary general meeting.

This will be the second in the past five months. As has been reported, it will again seek shareholders' approval, to allow Sir Anthony O'Reilly and his brother in-law, Peter John Goulandris, who are underwriters in the latest rights issue, acquire all of the shares not taken up in the issue.

They already own 24.6 per cent and, in the event that they are left with the entire issue, they would own a commanding 53.9 per cent.

That, or a somewhat lesser amount, would further fuel speculation that the group might as well be taken private.

Like the other egm, the outside shareholders at the latest meeting will give it the nod. The first one at 6 cent per share last December, raising €100 million, was designed to acquire the outstanding shares in Royal Doulton.

The price was at a discount to the share price and was 70 per cent underwritten by Sir Anthony and Mr Goulandris and 30 per cent by Davys.

Neither Sir Anthony or Mr Goulandris had to take up these shares and Davys placed the 30 per cent.

This one, designed to raise another €100 million, will be used on an important restructuring programme, aimed at taking out costs and estimated to save €90 million per annum.

However, with the share price of around 4 cent, and below the rights price, it has had to be totally underwritten by Sir Anthony and Mr Goulandris.

But with so many restructuring programmes - over half a dozen in the past 10 years - involving plant closures, redundancies and short-time work, investors and employees must be wondering when, if ever, the traumas will cease.

Sir Anthony describes this latest contraction as a "bold but necessary restructuring programme".

While regretting the job losses (1,800, including 485 at Waterford Crystal), he says, "these changes are vital to ensure the long-term prosperity of this historic company and its key heritage plans in Ireland, England, and Germany as we face increasing competition from low-cost economies in Asia and elsewhere".

While Waterford Wedgwood has been an appalling investment for shareholders, and the group has to take full responsibility for the nose dive in the share price, there is no doubting his personal commitment to the future of the group.

This can be seen in some of the banking covenants with personal guarantees for some of the subordinated debt, and the personal underwriting of this latest rights issue.

Ever since his early days in Heinz, Sir Anthony harboured a yen for the then Waterford Crystal.

Indeed, one can't help but wonder what would have happened with a lesser commitment, or with a different shareholder.

Indeed, the Waterford Crystal and Wedgwood brands, could have been acquired by another group and production moved elsewhere.

That must still be a remote possibility but, for now, the current rationalisation programmes give it the necessary breathing space, and if they work in accordance with the group's plans, will return it to profit. But before that, the expected bad news will be announced on June 16th, when the preliminary results for the year ended March 31st 2005 are announced.

At the half-way stage, it had net debt of €280.7 million, down from €429.9 million, which loomed largely against shareholders' funds of €200.6 million.

It also incurred an operating loss of €21.4 million compared with a profit of €4.2 million. The disposal of All Clad added a plus of €194.9 million to the bottom line.

This will, of course, feature in the preliminary results, but it is an exceptional and non-recurring item, and should be viewed as such.

The core business will show a big disimprovement on the previous year.

Chief executive Redmond O'Donoghue has already warned that "weak demand in January, February and the beginning of March, combined with an accelerated inventory reduction programme, will substantially impact our financial results".

However, these are historic; what is important is the future. Regrettably, the group does not give a breakdown of its traditional products and the new brands.

While the market for both has declined, industry sources say its share of the market has been maintained and, contrary to some views, the market for the traditional crystal product is holding up well.

Waterford Wedgwood has been complaining about overcapacity in the industry for the past decade.

Its own rationalisation of the industry included the closure of Johnson Brothers factories and outsourcing of production in China, the taking out of Hutschenreuther (a German ceramics firm) and putting that production into the neighbouring Rosenthal, the transfer of Royal Doulton UK production to Wedgwood's state-of-the-art facilities, and now the planned closure of the Dungarvan plant and transferral of its production to the Waterford Plant.

It has also agreed to sell 22 acres of land surrounding its Waterford Sports Centre, leaving it with little spare fat.

The workers at Dungarvan have turned down the redundancy terms. Negotiations are continuing.

However, the Dungarvan plant is not expected to close until September, so the benefits from this should not come through until the end of the calendar year 2006. Some benefits from the integration of Royal Doulton should come through this year.

And the output from the outsourced production in China should continue to show growth.

The savings of €90 million per annum estimated by the group are conditional on a maintenance of the euro/dollar exchange rate and the maintenance of the sales level.

That would bring the group back into profits but, under bank facility agreements, it cannot pay any dividends unless it records a pretax profit in excess of €20 million.

Ironically, if the currency markets turn very negative against the euro, following the referendum results in France and Holland, it would benefit (depending on the amount of hedging) Waterford Wedgwood.

However, as long as the group operates on margins that can be destroyed, or magnified, by these currency fluctuations, despite hedging, it will remain vulnerable.

It has to be asked: shouldn't currency benefits/costs be accounted for as exceptionals? Then the real trends will be apparent.

It is not only the redundant employees and shareholders that have suffered, it is also the executives with share options.

Mr O'Donoghue, for example, has options over shares, exercisable at different periods, with option prices ranging from 23 cent to 71 cent, representing between five and 14 times the present price.

Understandably, he let some options lapse last year. John Foley, chief executive of Waterford Crystal, also has options ranging from 23 cent to 71 cent.

Shouldn't these be adjusted downwards to reflect reality and provide useful incentives for these managers? Or is the group confident that these prices can be reached over the next few years?

The share price movements of the ADRs (equal to 10 ordinary shares) on Nasdaq, viewed on a semi-log basis, are interesting.

While they touched $2.50 a year ago, they had a treble bottom (twice in March, once in May) at 50 cents (US). That indicates resistance at that level.

bmurdoch@irish-times.ie