Thursday 21 September 2017

Richard Curran: Noonan takes the risk of punters buying shares in AIB

Ardagh chairman Paul Coulson now has the most valuable stake of any director of an Irish plc in the company they run Picture: Jason Clarke
Ardagh chairman Paul Coulson now has the most valuable stake of any director of an Irish plc in the company they run Picture: Jason Clarke
Richard Curran

Richard Curran

There was more than a little surprise at the news that Michael Noonan is to open up part of the AIB IPO to retailer punters. Share offerings to punters can be toxic for politicians. You can have all of the "buyer beware" warnings you like, but if the stock doesn't deliver, the public often blames the Minister presiding over the flotation. It isn't clear why he felt the need to do it.

Perhaps it has to do with all of that publicity around how much money vulture funds have bagged in recent years by buying assets, often from Nama, at rock-bottom prices and then flipping them in the short term to make a fortune.

But these bottom fishers take higher risks, and tend to invest when there is so-called blood on the streets. That is not the best time to start offering assets to punters.

There hasn't exactly been a clamour or public outcry about getting a shot at buying into AIB. However, a retail offering has to be done at some point in the State's sale process, otherwise AIB will be fully re-floated in a few years' time with exclusively institutional investors on its share register.

The State will most likely sell down its shareholding in AIB in different phases. Keeping the public out of the first phase might have smacked of letting the institutions in first at a lower price.

So, is AIB a good bet? Well, first of all I wouldn't recommend borrowing money to buy the shares. Despite this, it is not a risky investment. AIB remains a strongly capitalised bank that is unlikely to go off the rails any time soon.

The real question is about whether there will be sufficient growth in the lending economy to justify significant share price growth.

New US commerce secretary Wilbur Ross bought into Bank of Ireland shares at 9c and sold for around 30c.

That money has been made. If you look at the performance of the Irish economy and Bank of Ireland in recent years, it has done well, yet the share price is still languishing around the 27c mark. Investors who bought into PTSB in April 2015 at €4.50 per share are nursing heavy losses as the stock trades at €2.65.

Buying into AIB shares will essentially be about buying into the Irish economy recovery story. It will depend on when they are sold and at what price.

The figures behind Coulson's 'cool' €1.5bn

Good news for Ardagh chairman Paul Coulson. He launched his long-awaited IPO, and based on valuation estimates his 36pc stake in the glass and metal container giant is valued at around €1.5bn. It's a long way from the old days of the small sleepy glass bottle manufacturer in Ringsend of the 1990s. Back then Ardagh used to be criticised for having the cash but not the "bottle", as it were, to press on with acquisitions.

But Coulson certainly made up for that after taking the firm private and putting together a series of extraordinarily huge deals. The massive value of Coulson's personal stake is based on what investors are paying for new shares in the company equivalent to around 7pc of the equity.

It gives him the most valuable stake of any director of an Irish plc in the company they run.

That honour used to rest with Tony O'Reilly when his shares in Independent News & Media hit €500m at one point.

The obvious comparison today is with the market value of Michael O'Leary's 4pc stake in Ryanair, which is valued at around €705m. Coulson's stake is more than double it.

The comparison is interesting. O'Leary's shareholding in Ryanair is in a company with high levels of liquidity in its stock, which has been internationally traded for two decades. It pays a dividend and the group is on a very strong growth trajectory.

The other big factor is debt. Ryanair's EBITDA in full year 2016 was around €1.4bn on revenues of €4.6bn. It turned in a profit of €1.2bn.

Ardagh has sales of around €7.7bn and EBITDA of around €1.2bn. But its €7bn net debt is more than double Ryanair's €3bn.

There is no doubt that Coulson and his management team have brought the business to an extraordinary level, with more than 23,000 employees at over 100 facilities.

But when it comes to putting a value on anybody's stake in anything, it really depends on what someone is willing to pay for it. Ardagh is raising around €300m from the IPO share sale, which will be used to reduce debt.

Coulson has managed the balance sheet tightly in the run up to the float after several years of ballooning debt. He has refinanced older debt at lower rates.

He has reached a stage where the only debt due before 2021 is a $265m (€249m) bond payable in 2019. This will give Ardagh some headroom to drive forward with the businesses it has, repay debt and perhaps gradually sell more equity into the market. The next few years at Ardagh will be about maximising the return from the businesses it has rather than eyeing up the next big deal. A lot done, more to do, as they say.

Cheltenham beware as Corcoran tightens reins

Betting giant Paddy Power Betfair reaped many of the rewards of its merger last year, despite a net-loss figure and headlines about what a tough Cheltenham it was.

On Tuesday, the group reported a £5.7m (€6.52m) loss for the financial year ended December 2016. This was mainly due to merger expenses. The true performance picture showed the value of the merger to investors as it turned in an 18pc increase in revenues to €1.55bn and a massive 35pc rise in EBITDA to €400m.

This gives some idea of the profit potential that lies ahead. Yet the shares fell 5pc on the back of concerns about the performance of its online gaming business.

Chief executive Breon Corcoran was quite candid about saying it had perhaps taken its eye off the ball a little in this segment, as growth in online gaming slowed in the fourth quarter.

Online gaming is enormous, especially in the UK but is becoming incredibly competitive. Recent figures show that of the £4.6bn (€5.26bn) of online gambling in the UK, around £2.6bn (€2.97bn) comes from casino gaming.

Corcoran has delivered so far on the merits of the merger and the group may end up returning more money to shareholders if it cannot identify suitable acquisitions.

Corcoran doesn't want to return too much to Cheltenham punters though having lost €20m to them last year. He said he doesn't expect to lose that kind of money this year. Given that he doesn't know who is going to win, he is obviously preparing to tighten up on odds and risk management this year.

Punters - you have been warned.

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