Battle over control lies in store for iconic retailer
THE future of a single Dublin department store might not seem that big a deal in the overall scheme of events in a post-crash Ireland. But Arnotts has been around since 1843 and when it really ran into problems in 2010, the Taoiseach's department intervened to make representations with its bankers, not to shut it down.
The future of the department store now looks safe, after two separate bidders have bought its debts. However, it is far from clear which of them will end up owning it. It could even be a combination of both.
Last week the Competition Authority gave the go-ahead for both parties to take what it called joint control of the Arnotts group of companies which includes the department store, retailer Boyers and a large four-acre tract of development sites near Henry Street in Dublin.
One buyer is Fitzwilliam Finance, which is made up of Noel Smyth and Canadian billionaire Galen Weston, who also owns Brown Thomas and Selfridges. The other is US investment firm Apollo, which is being advised on the deal by former Bank of Ireland chief executive Brian Goggin.
In a way they both rained on each other's parade and now have to cut a deal or work together. The Smyth & Weston boys moved first by acquiring around €140m of Arnotts debt owned by Ulster Bank. They then bid strongly to buy the €230m of IBRC debt. But they were outgunned by Apollo.
The two banks had taken ownership of the business back in 2012 but it has never been made clear what shareholdings they each had. It has been suggested that it was roughly 50:50 but other reports have speculated that Ulster Bank's share (now held by Smyth & Weston) was around 49pc with IBRC holding around 43pc and further few per cent were lying around somewhere else.
The precise breakdown of the shareholding matters because it tells who has the slight upper hand going into any new talks between the parties about what they will do now.
Arnotts group is held by an Irish company called Arnotts Holdings Ltd. This in turn is owned by an Isle of Man company called Art Holdings Ltd. However, company records in the Isle of Man draw a complete blank as to the make-up of the shareholding.
Good old Richard Nesbitt, who bought Arnotts in a management buyout in 2003 and then loaded it up with over €300m of debt, used a very opaque Isle of Man structure.
Never ones to go too deeply into corporate transparency, the Manx government established a new kind of corporate vehicle in a Companies Act in 2006. Prior to that, limited companies had to publicly disclose their shareholders and authorised share capital but not their accounts.
New limited companies set up after 2006 don't have to disclose shareholders in their company register returns. But they can if they choose.
Showing all the usual transparency of a plank, IBRC has not disclosed the make-up of the shareholding in the Manx Companies Office, despite it being a publicly owned bank that has cost the taxpayers over €30bn. Neither has Ulster Bank, despite being bailed out by British taxpayers.
One question is how could Ulster Bank's €140m in loans deliver a bigger shareholding than Anglo's €230m, as has been speculated? This may relate to the quality and seniority of the Ulster Bank debt.
There are a number of scenarios that could play out in the coming months.
1. Apollo, which has deep pockets, could buy out Smyth and Weston. This would see the retailer and the developer make a quick turn on their money. Smyth and Weston's plan has been to let the Canadian's retail expertise take over the Arnotts store, and let Smyth develop the ancillary properties. Nesbitt borrowed over €200m to assemble these sites which later got An Bord Pleanala approval for 47 shops, 14 cafes, restaurants and bars, 175 apartments and a four-start hotel.
Clearly Weston has a plan for the Arnotts store and would probably like to develop it over the next five, 10 or 20 years. He has owned Brown Thomas since the 1970s. He is unlikely to walk away.
2. Smyth and Weston buy out Apollo. This would enable Apollo to sell its stake at a quick profit and do a nice bit of business. However, Apollo has been sniffing around the Irish commercial property recovery story and would probably like to get its hands on a trading company combined with a development opportunity. It is not a retailer but neither were IBRC and Ulster Bank. They hired Palladin Group to run the business for them.
Palladin did a good job in stabilising the trading performance, cutting costs and giving Arnotts some new impetus in a serious recession. Palladin was paid €1.2m for its services in the year to January 2013.
Apollo could reduce its stake to give Smyth and Weston more operational control, get a quick return, while keeping some skin in the game by retaining a shareholding.
3. The third scenario is that they work out some kind of carve-up between them. Weston could get the retail business and Smyth could combine with Apollo for the property development. This kind of shared break-up might work best for them all.
4. They stick to their guns, work out a shareholder arrangement based on their current share entitlements and try to work together.
Arnotts has taken the pain of recession, redundancies and impairment charges. In the year to January 2013 its total sales fell from €118m to €117m. This includes the sales of concession operators in the store. Arnotts' own direct sales fell from €75m to €69.8m. When one-off restructuring charges are excluded it reported an operating loss of €3.8m, up from €3.1m.
That is not great but not bad relative to the cash haemorrhaging of the previous few years. It will have got a good boost from a pick-up in 2013 and is likely to see that improve further this year.
Speculation is that both bidders bought the debt at around 40c in the euro. This suggests a hit to Ulster Bank of around €78m and an IBRC hit of around €138m.
The store looks safe and likely to improve no matter which outcome materialises. Weston might want to own the store for 20 years. Apollo might want more like a five- to seven-year return, by selling on.
It is extraordinary to think that 10 years ago Arnotts was a solid retailer with tens of millions of surplus cash in its pension fund. A decade later and it's a property play, while the defined benefit pension has been distributed and closed down.
Given that the Competition Authority is not worried, perhaps retailing is best left to the retailers.
Sunday Indo Business