Friday 30 September 2016

Take-off of the Aer Lingus deal leaves a new gap for the Irish stock market

Published 04/06/2015 | 02:30

Aer Lingus looks set to be the next high profile exit from the list of companies quoted on the Irish Stock Exchange. It is part of a long-term pattern that has seen literally dozens of firms depart the listing in the last ten to 15 years.

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That is no bad thing. Many, like Aer Lingus, have been bought out, and at decent valuations too, while others were simply casualties of the dotcom or financial crashes.

The real indicator of a vibrant market is not how many companies go off the exchange but how many join through new IPOs or listings from abroad.

At least the Irish Stock Exchange can boast a number of pretty solid and sizeable additions to the ISEQ in recent years.

We have seen three property Reits with large market capitalisations float in the last two years: Green Reit (€1bn), Hibernia (€860m) and Irish Residential (€462m). Add on hotel group Dalata (€333m), pharma group Malin Corporation (€390m), industrial tool maker Mincon (€143m) and medical devices group Mainstay Medical International (€143m), and the scoreline could be a lot worse.

It is only when you look at the number of very large high profile exits, that you get a sense of the enormous change that has happened.

The list since 2008 includes Anglo Irish Bank, Elan, McInerney, Qualceram, Readymix, Waterford Wedgwood, Blackrock Land, Boundary Capital, Newcourt Group, Siteserv, TVC Holdings.

Between 2000 and 2005, some 41 delisted. Throw in those who have taken their primary listing abroad and it includes: DCC, Greencore, ICON, UDC Healthcare and Grafton Group.

Despite all of this upheaval there are some positive signs. Eircom recently reported that it had turned down a buyout approach as the board wants to get back on track with an IPO.

Similarly, filling station chain Applegreen has also spurned a private equity bid to pursue a stock market listing.

Having a vibrant IPO market is hugely important because it adds to the vibrancy of the venture capital market in a country. IPOs provide much greater returns to investors than trade sales.

Denis O'Brien turned down a bid of about $200m for Digicel not that long after he set it up. He built it up into a multi-billion dollar business. How many approaches must a company like Paddy Power have had before building a €3.5bn business?

But we have to ask ourselves why have so many of our best businesses not gone public. In some cases they didn't want to stick around for the long haul, while in others it was a personal choice of the founder.

IPOs have many benefits. They even raise valuations for trade sales. A stock market flotation can in some cases return ownership and control of a business to the entrepreneur.

Despite these obvious benefits, Irish business does not have a good track record in creating IPOs relative to either the US, or Europe. When it comes to providing a big payday for investors, trade sales dominate Irish exits. Research conducted by Trinity College a decade ago found that one-third of all venture capital divestments in Ireland were through trade sales.

Only 5pc of venture-backed companies in Ireland went public, compared to a European average of 20pc. There is little reason to think the situation has changed since 2005 and in fact may be even worse.

The avalanche of foreign investment that has come into Ireland since the worst days of the crash has resulted in numerous private equity buyouts, as well as trade sales, but just a handful of IPOs.

Why do we not do more IPOs? Some of it relates to the limited number of scalable businesses we create. Some of it has to do with the relatively poor promotion of the IPO route in the past.

However, much of it is cultural. "Equity is blood" is how Michael Smurfit once described the importance of holding on to a stake in a business. Jefferson Smurfit Group gained enormously over the decades from flotation.

But interestingly, Smurfit himself wasn't the one who floated the company. It was his father and Michael wasn't mad about the idea originally.

He told author Ivor Kenny in 2004. "Dad had gone public in Ireland, against my advice, at eight shillings a share. They opened at 12 shillings and never looked back. Big fortunes were made in our stock - at our family's expense."

Financing a business from startup to flotation is not all that different for many companies. It goes from entrepreneur, to friends and family, to angel investors, to venture capital and then to the exit/liquidity event.

Amazon, for example, set up in 1994 by Jeff Bezos with $10,000 in capital and $44,000 in borrowing, followed this exact template until it floated just three years later.

So where will future Irish plcs come from and why are they not floating? Companies have to adopt the mind-set while they are small. SMEs in Ireland seem to automatically expect that a change of ownership will come through a trade sale.

They do not plan for an IPO by recruiting a suitable management team or board of directors with IPO experience. They often mistakenly think they are too small.

To some extent the flotation of three real estate Reits and hotel group Dalata has taken the bad look off an otherwise dearth of corporate activity.

As a business the Irish Stock Exchange is doing well. It has demutualised to an unlisted public company itself and last year it added over 7,000 new debt listings and 1,600 new fund classes.

The number of equity transactions reached a record high of 4.5m but perhaps this reflects the growth in private wealth investors as opposed to bigger institutional transactions. The exchange is aware of the issues. It is running training programmes for suitable executives aimed at getting their companies IPO ready. It is trying to catch them early.

This is a positive initiative by the stock exchange but it is hard to see a big stream of tech companies for example taking the IPO route.

Dublin in particular is a hub of innovative small tech companies but many would see the image of a Silicon Valley founder approaching with a big chequebook as the pinnacle of their ambition. And who can blame them?

The track record of publicly quoted Irish technology companies from Iona, Trintech, Norkom Technologies and CBT, to Riverdeep and Baltimore has been both brilliant and bizarre.

The fact is that not one of them is around today as a standalone listed company.

Chip designer Movidius might become a billion-dollar business but would it float in Dublin? I doubt it. The Limerick Collison brothers might be billionaires with Stripe, but they will have done it in the US. If we can't do it in tech, and we don't have the tradition in scalable manufacturing companies, that leaves retail, services and property.

It is not a very large hunting ground. Part of the problem is getting entrepreneurs to stick it out for the long haul.

The techies like to sell and their businesses often need a big player behind them. The old-fashioned industrialists are often too stubborn and too private to go down the plc route.

Our great food groups probably would have sold long ago if it wasn't for the co-ops behind them.

There are signs that some of this is changing. Irish business people are much more willing to accept private equity investment or venture capital than in the past.

Convincing them of the IPO option is still a challenge.

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