Monday 29 May 2017

Delivering for investors

IFG finally looks like having its true value realised with a takeover, netting Bourke a handsome return in the process

This week's announcement from IFG that two potential bidders are conducting due diligence on the company means that chief executive Mark Bourke could end up being the only boss of an Irish financial services company to have made money for his shareholders over the past five years.

On Wednesday, IFG, the Irish pensions administration and financial advisory business, revealed that two suitors were conducting due diligence with a view to bidding for the company.

On April 21, a potential bidder, believed to be private equity group Bregal, approached the IFG board with an indicative offer that was rejected as inadequate.

However, Bregal refused to take no for an answer and returned on May 11 with a higher offer.

News of Bregal's interest smoked out another potential bidder, believed to be a consortium including IFG's largest shareholder Fiordland.

It signalled its interest in making an offer for IFG on May 13 and submitted the terms of its indicative offer on June 7.

The presence of not one but two potential bidders has done wonders for the IFG share price. Having languished at just more than €1 for most of the past 18 months, it finished this week at €1.84.

This brings it within striking distance of the €2.05 at which it had been trading when Mr Bourke was appointed chief executive in March 2006.

And no one expects the IFG board to agree a sale at the current share price. With two potential bidders in the field, it is now clear that there is still considerable scope for the share price to rise even further.

IFG has an unusual pedigree for an Irish financial services company. Originally a textile company, it was transformed into a pensions administration and financial advice company by its chairman Joe Moran and former chief executive Richard Hayes in the early 1990s.

For more than a decade IFG flew under the radar, quietly absorbing small businesses within its niche areas.

When the company did begin to attract publicity it was not of the welcome kind. In March 2006, Mr Hayes unexpectedly quit as chief executive just one day before he was due to give evidence before the Mahon Tribunal.

Earlier that month, Mr Moran had told the tribunal that he had paid disgraced lobbyist Frank Dunlop £25,000 (€31,750) in 1992 to lobby for planning permission for a site he owned at Lissenhall in north Co Dublin. No finding of impropriety has been made against either Mr Hayes or Mr Moran.

Following Mr Hayes' departure, Mark Bourke, who had previously been IFG deputy chief executive, succeeded him as chief executive.

Under Mr Bourke's leadership, IFG has hugely expanded its pensions administration business through a series of acquisitions. In December 2006, IFG paid £11m (€12.1m) for the Jersey-based Langtry Trust. He followed this up in October 2008 with the acquisition of two Irish-based pensions businesses for a total of €13.5m.

Then, in December 2009, came the big one when IFG paid £35m (€38.7m) for James Hay, the largest providers of Self-Invested Personal Pensions in the UK, with over £8bn (€8.86bn) of SIPP assets under administration.

The James Hay deal was a transformational one, with IFG's revenues rising from €93m in 2009 to €120m in 2010 and operating (pre-interest) profits jumping from €17.9m to €24.4m over the same period.

By the end of last year, IFG had €70bn of assets either under administration or advice and had slashed its borrowings from almost €44m to less than €15m.

Mr Bourke had successfully transformed IFG from being something of a Stock Exchange oddity into the market leader in a large and growing field.

He has also successfully diversified IFG business away from the chronically depressed Irish market. In 2010, just 13pc of its revenues and none of its profits came from its Irish operations.

Unfortunately, the Stock Exchange didn't want to know. Until news of possible bidders emerged last April, IFG had a market value of less than €180m.

Even after the recent increase in the share price, the whole of the company is still worth only €232m. At that price, IFG is seriously under-valued -- which is why potential bidders are sniffing around the company.

IFG largely funded the James Hay purchase through a share placing that raised €50m. Most of the new shares were purchased by Fiordland, a company owned by Edmund Truell, whose Pension Corporation is one of the leading service providers to UK defined benefit pension plans.

Following the placing, Fiordland ended up with a 19.3pc stake in IFG.

While the circular issued to shareholders at the time of the James Hay acquisition and the share placing assured IFG shareholders that Fiordland was "a long-term strategic investor", it would now appear that Fiordland's definition of "long term" isn't very long term at all. With most investors at best only lukewarm about IFG, Fiordland paid just €1.05 per share in December 2009, a total of €26.4m for its stake. Even at the current share price, Fiordland would a turn a €20m profit on its shareholding.

A business such as IFG's holds many attractions for a private equity buyer. For a start, unlike most financial services companies, its appetite for capital is relatively modest.

Despite having €70bn of assets under either administration or management, IFG's total equity at the end of 2010 was a mere €107m, just 0.0015pc of the total.

This is because IFG's business model doesn't involve capital-intensive activities such as lending but concentrates its efforts on pension administration and advice, activities that generate fee income and require very little capital and expose the company to virtually no risk.

Even when things do go wrong, as happened when profits collapsed at its Irish mortgage broking subsidiary, IFG merely took a once-off €1.15m hit as it downsized the operation to adjust to the reduced volumes of business.

Compare this with the tens of billions of euro the Irish banks have had to write off on their loan books.

And just for good measure, IFG has continued paying dividends to its shareholders in good times and bad. Last year, IFG paid out a total of €5m, four cent per share in dividends. Bank shareholders, for whom dividends are a rapidly receding memory, can only look on in envy.

So what does the future hold for Mr Bourke and IFG? Its dominant position on the share register means that the group's fate will be largely determined by Fiordland. If it chooses to stick with Mr Bourke then any unwelcome bidder can be sent packing.

That's unlikely to happen, though. Fiordland is sitting on substantial unrealised profits and is also reputedly linked to one of the potential bidders. With the Stock Exchange failing to adequately value IFG, a firm offer for the company looks very much like a question of when rather than if.

This will trigger a big payday for Mr Bourke who owns 553,000 IFG shares and also has in-the-money options over a further 500,000 shares under the company's long-term share incentive plan, valuing his total stake at €1.3m.

With all of the other Irish financial services companies having performed so abysmally in recent years, there will be very few IFG shareholders who will begrudge the former tax adviser his good fortune.

Irish Independent

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