Even the loser in the Arnotts battle could make a packet
An elderly woman recently remarked to me how much she enjoys having a look around Arnotts whenever she makes a trip to Dublin. She hadn't been there in a while and she said she couldn't believe how much the iconic department store had improved. Presentation and layout was better. The whole place had had a very effective facelift she said.
And she is right. The funny thing is that all of this happened while it was owned by a State-controlled bust bank (Anglo Irish Bank/IBRC) and a bank that had to be bailed out with billions of euro by the British taxpayer (Ulster Bank).
Arnotts was a classic casualty of boomtime property speculation and recession-era belt- tightening by shoppers.
Two groups have been vying for over a year to take control of Arnotts from each other. They own 50pc each (well 99pc together) and both seem to want the whole lot. In one camp is Noel Smyth who initially teamed up with Canadian owner of Selfridge's, Galen Weston. Back in late 2013 they bought out €140m of Ulster Bank's debt for what is believed to be around €50m.
Weston has since left the party and been replaced in the Smyth camp by the Livingstone brothers - two British property investors who bought the Four Seasons hotel in Dublin for €15m in 2011 and sold it a few weeks ago for €50m.
In the other camp is US investment giant Apollo. It has been joined on its team by BlueGem - a private equity firm that owns upmarket London department store Liberty.
Apollo beat Smyth in the purchase of around €230m in loans sold by IBRC for what was reported to be around €45m. This deal entitled Apollo to 50pc of Arnotts.
Either Smyth rained on Apollo's party or the other way around, depending on how you look at it.
The first obvious question is how come IBRC's €230m of loans were worth the same half share in Arnotts as the €140m owed to Ulster? That was based on a deal hammered out between the two banks and probably reflects the fact that Anglo's loans were mainly secured on development property assets around Arnott's city centre store. Those sites had fallen more in value.
It looks as if Ulster took a bath of about €90m on its loans while IBRC could have been hit for €185m.
So, what happens now? Both sides are locked in discussions which may well result in bids by each side to buy out the other. This is a fascinating and quite unusual situation.
Smyth's original idea was for Weston to run Arnotts and he would get the 16 development sites in the portfolio which include buildings on Middle Abbey Street, Henry St and points in between.
Apollo is also in the business of developing property, as well as owning assets such as a department store.
Neither the store nor the development potential of the sites can fully flourish until the shareholding is sorted out. Both sides appear to agree on that.
The company is crippled by its legacy debts of over €320m, now owed to these two groups. Arnotts racked up another €16m interest bill last year.
How much is Arnotts worth and how much might one side receive for walking away?
Arnotts had assets on its balance sheet of €95m at the end of January 2014. In the previous 12 months it had a turnover of €70.7m, up slightly from €69.8m. Of that around €55m came from the sale of its own goods while it received another €13.8m in commissions from holders of concessions in the store.
If you exclude one off gains on the pension fund and a write-back on a previous depreciation charge, the business made an operating profit of €2.5m that year. This was a strong turnaround on previous recession years when it was losing millions.
Costs have been slashed and the store has improved. Investment in jewellery, ladies shoes and other departments is paying off with sales rising strongly.
If it could get to profits of €4m per year, 15 times profit would see it worth €60m. The development sites around it are a slightly different proposition. They are in good city centre locations but existing buildings would have to be demolished and it would require big investment to develop them.
Arnotts rental income from investment properties was just €208,000 in the year to January 2014, further reflecting the scale of the multi-million euro waste of money spent during the boom accumulating sites for the abandoned €700m Northern Quarter plan.
Commercial property prices in Dublin may have risen by 30pc last year, but development sites have not gone up by as much, especially ones not paying any rent.
Both sides of this corporate battle have deep pockets. The Livingstones have just bagged a €35m profit on the Four Seasons and have access to a lot of money. Apollo manages billions in investment funds.
Apollo could do a deal with Smyth in which it keeps the store and he gets the development properties. But all of the speculation so far is based on there being a private bidding process in which winner takes all.
The ground rules alone around such a process would be incredibly complex. Are there second round offers or does it all just depend on a single number in a sealed envelope? If highest price is the only criterion, then the banks could end up looking very dumb when they see how much is paid for the store.
It now seems inevitable that either party will have to receive more than they paid for the loans, in order to walk away. Because both sides bought from loss making banks on the retreat, this is one battle in which even the loser stands to make several million.