A ruling in London has added some weight to an attempt to prise part-ownership of a fabled hotel group from an Irishman, writes SIMON CARSWELL
THE BATTLE between the Barclay brothers and Irish businessman Paddy McKillen for control of the Maybourne Hotel Group in London is not the first time the luxury hotels have been the subject of a takeover tussle.
In the 1950s, hotelier and one-time mayor of London Sir Hugh Wontner and his fellow directors of what was then the Savoy Group blocked takeover bids by Sir Charles Clore and later property firm Land Securities.
Hotel company Trusthouse Forte sought unsuccessfully to obtain control of the hotels for most of the 1980s.
The case taken by McKillen against Sir Frederick and Sir David, owners of The Ritz hotel in London and the Daily Telegraphnewspaper, in the High Court in London continues this long history of hostile takeover attempts of the hotels.
The brothers have drawn first blood in the legal fight, winning a preliminary court ruling on Wednesday that their purchase of a company, Misland, which owns 24.78 per cent of Coroin, the company behind the hotels, was valid.
The ruling by Mr Justice David Richards sets out the background in the first official account of the Barclays’ takeover attempts so far.
The £750 million (€1.1 billion) takeover of the group by financier Derek Quinlan and fellow investors in 2004 has become a well-told tale that captures the financial fire-power of Irish investors during the Irish property bubble.
The original shareholders were McKillen, Riverdancefounders John McColgan and Moya Doherty, Misland (the Cypriot company owned by Manchester businessman Peter Green and his family), Quinlan and number of other minority investors.
These investors included for a short time Sean FitzPatrick, the former chairman of Anglo Irish Bank, which helped finance Quinlan’s purchase of the group.
The court ruling says the share register of Coroin at December 2010 comprised McKillen (36.23 per cent), Quinlan (35.4 per cent), Misland (24.78 per cent) and stockbroker Kyran McLaughlin of Davy’s in Dublin (3.58 per cent).
The ruling this week centred around a May 2004 agreement among shareholders where it decided that they would get pre-emptions rights and first refusal to buy the stakes of any of their fellow investors if they decided to sell up.
The judge set out the background to the Barclays v McKillenrow in plain language.
“The Barclay brothers have been unable to reach agreement with Mr McKillen for the acquisition of his shares,” he said.
“They have decided to obtain control and ownership of the company by other means and have set out on a course to achieve that.”
McKillen has made it clear that he has no intention of selling.
He claimed in the legal proceedings, taken on October 5th, 2011, that the steps taken by the Barclays to build up their interest in the hotels has been in breach of the shareholders’ agreement.
“He alleges that all or most of the steps, together with the alleged conduct of the directors appointed by the Barclay interests, constitute unfairly prejudicial conduct of the affairs of the company,” said the judge.
McKillen alleges a conspiracy to “cause loss by unlawful means”.
The claim centres around the events of the past year where the brothers built up their interest.
In January 2011, the Barclays purchased Misland from the Green family for £70 million and appointed an employee of their company, Ellerman Investments, as a director on Coroin’s board.
The following month, the Barclays bought Bank of Scotland (Ireland) loans to Quinlan secured by charges over his shares in the hotels. These shares were transferred to and registered in the name of Ellerman Corporation.
The judge noted that the Barclays claim that the transfer was permitted under the shareholders’ agreement as being “a transfer of security to the security holder”.
This has been contested by McKillen but the issue is not subject to the court’s preliminary ruling.
Quinlan was replaced as a director of Coroin by an employee of Ellerman Investments in May.
The court ruling also notes that in September the Barclays bought other loans made to Quinlan which are secured on other shares in the hotel group and that McKillen also objects to the brothers taking security over these shares.
The judge said that in February 2011 McLaughlin’s shares were “offered to shareholders under the pre-emption provisions” in the shareholders’ agreement.
McKillen did not take up his pre-emption rights and McLaughlin’s shares were sold to Misland, then controlled by Barclay interests.
Again, an employee of Ellerman Investments replaced McLaughlin as a director on Coroin’s board.
These moves gave the Barclays control and effective ownership over 64 per cent of the group, leaving McKillen with 36 per cent.
In September the Barclays’ company, Maybourne Finance, purchased the group’s senior debt of £660 million (shortly before it fell due for repayment on September 30th, 2011) from the National Asset Management Agency.
“Mr McKillen asserts, and the Barclays interests deny, that this assignment was made in breach of the loan facility agreement,” Mr Justice Roberts said.
Immediately after acquiring the debt, Maybourne Finance made proposals to the company for a refinancing of the debt including a rights issue to raise £200 million.
This would mean that McKillen would have to inject £70 million to cover his share of the cash call if he is to avoid dilution of his stake.
“Mr McKillen alleges that the Barclay interests acquired the senior debt with a view to procuring a rights issue so as heavily to dilute his equity holding in the company,” said the judge.
The Barclays have also opened up another front to increase the pressure on McKillen in relation to a personal loan facility that he has with Irish Bank Resolution Corporation, formerly Anglo Irish Bank, secured on Coroin shares.
“Since October 2011, the Barclay interests have been seeking to persuade Anglo Irish Bank to sell the benefit of the loan and security to them,” said the judge.
Anglo’s loan of £14 million and the security on it, the car park at the Jervis Shopping Centre in Dublin, is the subject of separate litigation in the UK between McKillen and Northern Irish businessman Padraig Drayne concerning his shares in Coroin.
IBRC has resisted the Barclays’ overtures to buy McKillen’s debt because the loan represents only a small part of McKillen’s borrowings at the State-owned bank.
This week’s ruling gives legal standing to the Barclays’ ownership over 25 per cent of the group and represents a knockdown of part of McKillen’s argument around the shareholders’ agreement. Round one to the brothers.