Business Irish

Saturday 10 December 2016

what's in store?

Family's 143-year involvement with iconic retailer is coming to an end in dramatic fashion

Published 31/07/2010 | 05:00

The decision by the banks to take control of Arnotts represents a bitter blow for its chairman, barrister Richard Nesbitt. The move by the banks will bring to an end the involvement of the Nesbitt family in the business, which stretches back almost a century and a half.

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Arnotts has been part of the fabric of Dublin life since it first opened its doors for business in 1843, even meriting a mention in James Joyce's novel 'Ulysses'. In recent years, Arnotts' true-Dub credentials were reinforced by its sponsorship of the Dublin gaelic football and hurling teams from 1991 to 2009.

With huge range of stock -- everything from top-of-the-range furniture to frilly knickers -- Arnotts has been an integral part of Dublin's retail scene for generations of shoppers. Dubliners have relied on Arnotts to clothe their families and furnish their homes for the past 167 years.

The Nesbitt family first became involved in the business in 1867 when Alexander Nesbitt, Richard's great-grandfather, joined the company as a 16-year-old apprentice. Alexander became chairman of Arnotts in 1909 and the company has been controlled by the Nesbitt family ever since.

Well, until this week at any rate. On Wednesday it emerged that Anglo Irish and Ulster Banks, who between them are owed at least €300m by Arnotts, are to take control of the embattled retailer by converting all or some of their loans into shares. This is likely to result in the existing shareholders either being massively diluted or wiped out altogether.

Takeover

Arnotts' current problems have their origins in corporate financier Peter O'Grady Walshe's attempt to mount a takeover bid for the company in 2002-3. Backed by US investment bank Lehman Brothers (remember them?), O'Grady Walshe proposed paying up to €230m for Arnotts.

The weakness of Grady Walshe's position was that, with the Nesbitt family owning 10pc of the Arnotts shares and the staff pension fund owning a further 13pc, mounting a hostile takeover bid was difficult going on impossible. He needed the support of the existing Arnotts board if his bid was to stand any chance of succeeding.

Richard Nesbitt was having none of it. The barrister, who had been an Arnotts director since 1980, reckoned that the O'Grady Walshe offer massively undervalued the retailer, which had rich property assets and a massively over-funded pension scheme. The company had spent €55m renovating its Henry Street store in the 1990s and, at over 300,000 sq ft, it is now the fifth largest department store in Britain or Ireland.

Instead of meekly taking O'Grady Walshe's money, Nesbitt put together a bid of his own. His vehicle, Nesbitt Acquisitions, responded in May 2003 with a €257m bid which blew the interloper out of the water. Following the successful bid, Nesbitt became chairman of Arnotts.

Even in mid-2003 there were those who wondered if Nesbitt had overpaid for the company. However, the Celtic Tiger continued to roar and retail sales climbed to unprecedented levels. If post-2003 Arnotts had stuck to its knitting it would probably have been able to use its strong retailing profits to pay down a significant chunk of its acquisition debt.

Unfortunately, Arnotts didn't stick to its retail knitting. When Nesbitt took Arnotts private in 2003, one of his key advisers was a young and then relatively unknown corporate financier Niall McFadden. To the surprise of many, the fourth-generation retailing grandee and the young Turk got on famously.

Nesbitt had always believed that the market had undervalued Arnotts. Following the 2003 buyout, freed of the shackles of its Stock Exchange listing, he planned to bring Arnotts to "the next level". Advised by McFadden, he unveiled grandiose plans for a 'Northern Quarter' in September 2006. This would have involved the €750m redevelopment of a 5.5 acre site next to Arnotts' existing Henry Street store. The Northern Quarter would have included 47 new retail outlets, a 152-bedroom hotel, 189 apartments, 17 cafes, bars and restaurants, and a rooftop garden, with the whole lot topped off by a 16-storey tower.

Plans for the Northern Quarter brought long-simmering tensions between Nesbitt and the O'Connor family, who had been investors in Arnotts since the 1940s, to head. The O'Connors, who had taken a 24.75pc stake in Arnotts after the 2003 buyout, were opposed the Northern Quarter project.

In May 2007, the O'Connors bid €200m for Arnotts, in what was widely seen at the time as an attempt to force the Nesbitts to buy out their shareholding. If this was in fact the case, then their manoeuvre succeeded brilliantly. Richard Nesbitt and the Nesbitt family responded by paying the O'Connors €40m for their stake.

With the Celtic Tiger bubble economy about to burst, the O'Connors' timing was spot-on.

To replace the O'Connors, Nesbitt brought in McFadden's Boundary Capital as a 28pc shareholder, with clients of Anglo private banking acquiring a further 17pc of the company, leaving the Nesbitts with the remaining 55pc of Arnotts. Between them, the new investors paid €65m for their shares.

While the Boundary/Anglo Irish Bank deal more than covered the cost of buying out the O'Connors, Arnotts was also spending heavily to buy the properties needed for the Northern Quarter project. This meant that the company was rapidly increasing its debts at a time when retail sales were going over a cliff.

Despite this, Arnotts persisted with its plans for the Northern Quarter, going as far as to lease the former Debenham's outlet in the Jervis Centre while its existing Henry Street store was redeveloped.

The first sign that things had gone seriously awry at Arnotts came in February of this year. Boundary announced that it was writing down the value of its Arnotts stake to zero, while the group's banks agreed to roll over a €260m loan and provide a further €11m of working capital loans.

Then, a few days later, Arnotts announced that it was closing its temporary Jervis Centre outlet after successfully extricating itself from a 25-year lease. To retail-watchers, the meaning of the announcement was clear: the banks were after pulling the plug and the Northern Quarter project was not going ahead.

Ever since last February's announcements it was clear that time was running out for Nesbitt. Despite Arnotts pocketing €50m from the company's pension fund surplus at the end of 2007, as well as the €65m received from the Boundary/Anglo investment, the company's debts continued to pile up. These are now estimated to have reached at least €300m with Anglo owed €165m and Ulster Bank owed a further €135m.

Even before this week's news that they were planning to convert some or all of their loans into shares, there were unmistakable signs that it was the banks rather than Richard Nesbitt who were calling the shots at Arnotts.

US private equity group Paladin Capital, which specialises in restructuring troubled retailers, was drafted in to "advise" Arnotts after last February's restructuring, while former Brown Thomas boss Nigel Blow has also been acting as a company 'consultant'.

This week's news merely formalises these developments.

While Richard Nesbitt is understood to have been invited to stay on as a non-executive chairman of the reconstituted Arnotts, this can surely be no more than a face-saving, interim arrangement. In practice, the Nesbitt family's 143-year involvement with Arnotts is almost over.

Irish Independent

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