Sunday 4 December 2016

Patient US hedge fund decides to take control at Eir

Published 30/10/2016 | 02:30

PTSB chief executive Jeremy Masding’s ‘pivot’ at Permanent TSB looks more and more like a ‘rapid retreat’ from the UK market
PTSB chief executive Jeremy Masding’s ‘pivot’ at Permanent TSB looks more and more like a ‘rapid retreat’ from the UK market

There was little fanfare at the prospect of the control of telecommunications company Eir changing hands again. What first appeared like some kind of takeover bid for Eir turned out to be the exit of one shareholder, in a move that would give US hedge fund Anchorage Capital majority voting rights and an equity stake of 45pc to 49pc.

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This is the second time in two years that Anchorage has increased its shareholding in the company, which emerged from examinership in the control of its lenders back in 2012.

If the stake increase from Anchorage goes ahead, it would mean Eir will have had eight different controlling shareholders in the past 18 years.

It isn't a recipe for long-term success, but the company has made positive strides in that direction in recent years.

Its net debt is now running at around €2.2bn instead of pre-examinership levels of closer to €4bn. It recently repriced its debt, which will bring down its average interest rate to around 4pc.

In the 12 months to June 2016, it reported its first annual growth in eight years. Revenues last year were up around 4pc and earnings rose by about 5pc. It won't set the world on fire, but it marks real progress all the same.

And it is hard won. Eir is having to invest 20pc of revenues in capital expenditure and has given commitments to roll out broadband to rural areas. It is also bidding to win the state national rural broadband scheme contract.

Despite the progress and the company's growth in providing bundled packages of mobile, TV, landline and broadband, it is still seen as another 18 months away from floating on the stock market.

Anchorage is a carefully-managed fund that has around €25bn of other people's money to invest. It clearly sees the advantages of increasing its shareholding ahead of any IPO.

Eir shelved plans for an IPO in 2014 and rejected a €3.3bn takeover approach last year.

Eir represents Anchorage's third-biggest investment. It isn't Anchorage's only investment with an Irish connection. It is also a shareholder in another former Irish company that got into trouble with high debt levels - Houghton Mifflin Harcourt (HMH), the educational publishing house that used to be run by Barry O'Callaghan.

HMH, which also saw its lenders take over the company, apparently has proven to be a bit of a drag on Anchorage's investment performance this year, with its Nasdaq-listed shares down 40pc so far this year.

Anchorage clearly sees value in sticking with Eir and increasing its stake as York Capital sells its near 10pc stake. It is proving to be a patient investor for a hedge fund.

When does a retreat become a 'pivot'?

Permanent TSB has pulled off a bit of a coup by selling its remaining non-core UK mortgage book quite a bit sooner than many expected.

The bank said the deal completes the deleveraging programme that was a core condition of the restructuring plan agreed for the group by the European Commission.

The loan assets were everything that remained of its former UK subsidiary, Capital Home Loans Limited.

PTSB chief executive Jeremy Masding said the deal would "complete our pivot to the Irish retail marketplace and allow us to focus exclusively on growing our commercial position in key segments of the market here".

He is right about enabling the bank to focus on Ireland - but as to whether this constitutes a "pivot" is another matter. It is a bit more like a "rapid retreat".

Beating a retreat from the UK market by exiting a multi-billion euro loan book might not seem like much of a coup at all.

However, the state bailed-out bank has been keen to complete the sale of this UK mortgage loan book, having sold half of it last year. Analysts didn't expect to see a sale go through until late next year or even later but PTSB announced that it had sold the €2.29bn book to Cerberus Capital Management at a 15pc haircut.

Analysts had also expected a larger haircut too, with Goodbody saying it had pencilled in a haircut of around 17.5pc.

The sale not only allows management to concentrate on growing its mortgage and banking business in Ireland but it should also boost 2017 profits by around €50m, according to Davy.

However, it will now face fresh pressure to cut interest rates on foot of KBC's recent move.

The loan sale marks the end of an extraordinary misadventure in the UK market for PTSB. Its timing during the boom was hopelessly wrong as it ratcheted up UK lending in the latter years of the boom.

In 2007, for example, when house prices began falling in Ireland and the credit crunch kicked in across the water, PTSB's UK operation grew its lending by 40pc.

At least a line has now been drawn under the whole thing and the bank can get on with trying to pay back the rest of that bailout money.

Brexit headache upsets the apple cart for C&C

Selling booze in Ireland and the UK isn't as easy as it used to be. At the top of the beer market there are hipster-inspired brews that can command a hefty premium price. But those hipsters aren't drinking huge volumes.

At the lower end there are continuous price pressures where brewers have to sell it cheap to maintain market share. In the middle of all that is cider - a tricky category at the best of times.

Now, a drinks business like C&C has Brexit to contend with. The company's half-year figures were pretty much as expected in a tough and competitive market environment. But the falls in sterling are a new headwind. And Brexit could be an even bigger headache further down the road.

C&C recently told a House of Lords committee on Brexit that it sources 80pc of its apples in the UK, even for processing in Ireland and that future tariff complications could prompt the firm to source elsewhere.

In its half-year results during the week C&C reported earnings before interest and tax (EBIT) of €55.1m. Operating profits in Ireland stabilised and the business saw growth in its core brands in Ireland and the UK.

But it is a tough picture in Scotland where net revenue fell by 6pc with both pricing and volumes affected.

For Stephen Glancey has his senior management team there may well be plenty at stake, given the share options and LTIP arrangements that are in place. His LTIP share allocations, which are at an exercise price of zero, only kick in on the back of achieving compound annual growth in underlying earnings per share above certain limits over a three year period.

Sterling alone might make that difficult never mind any wider market conditions around consumption, price and brand performance.

Nevertheless, Glancey has done well at the company and received some just rewards. He currently has 5.1 million shares valued at almost €18m. Who wouldn't drink to that?

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