Tuesday 20 February 2018

Tapping global debt markets to boost business seen as best practice

But it proved deadly

Judge Peter Kelly
Judge Peter Kelly
Donal O'Donovan

Donal O'Donovan

ANTHONY O'Reilly's name as been inextricably linked with some of Ireland's biggest and most iconic Irish companies over the years, but his greatest success was in the US with Heinz.

At home, though undoubtedly successful, Dr O'Reilly's pioneering use of relatively aggressive levels of corporate leverage – borrowing in layman's terms – has had decidedly mixed results on business he dominated through the years.

In the 1980s and 1990s his access to the growing debt markets and the latest innovations in US financial wizardry helped catapult the likes of Independent News & Media (INM) and the Waterford Group on to the world stage.

But that was before the global financial crisis – and, in particular, the credit crunch which started in 2007. It brought heavily-borrowed businesses across the world to a juddering standstill.

Two years ago the battered remains of Eircom emerged from the country's biggest ever corporate insolvency.

Justice Peter Kelly, who presided over the examinership, left no doubt about where he saw the roots of the Eircom crisis. It followed a "game of corporate pass the parcel, where the company was the loser", he said.

The succession of takeovers he was referring to began really with the debt-financed acquisition of Eircom by the Anthony O'Reilly-led Valentia consortium in 2001. From then on Eircom became weighed down by ever increasing amounts of debt as each buyer in succession took money out of the business, but piled more and more debt on.

Rivalry over Eircom was the genesis for a damaging fall out with business rival Denis O'Brien that would be revived and played out again at great financial cost in a later battle for Independent News & Media (INM), which publishes this newspaper.

But in his time at the helm of Eircom, O'Reilly did exceptionally well, both for himself and those who backed him – spectacularly so indeed – selling the business within four years at a substantial profit.

O'Reilly and his co-investors in Valentia certainly can't be blamed for Eircom's collapse. The around €2.4bn it borrowed under his chairmanship was little more than half the eventual debts the business managed to run up.

However, Valentia's tenure undoubtedly established the template that would eventually bring Eircom down.

It was a pattern repeated elsewhere.

INM's shareholder dividend was regarded as "the safest in town" throughout much of the 2000s. As a profitable media business in a booming market it paid out hundreds of millions to its shareholders over the years – including O'Reilly as the biggest single shareholder until 2009.

Between 2000 and 2007 – O'Reilly received in the order of €140m from the business. But INM was also borrowing through those years, including to finance expansion into markets as diverse as India and New Zealand.

Under O'Reilly's guiding hand, sales at the newspaper group peaked at a staggering multiple of 140 times what they had been in 1973.

But, when the crash came, INM was caught in a perfect storm.

Revenue fell as the economy slumped, and efforts to re-finance the company came up against the brick wall of broke banks.

Shareholders, including O'Reilly, saw the value of their investment plunge.

It was a similar story at Waterford Wedgewood, where Mr O'Reilly and his brother in law and co-investor Peter Goulandris ploughed €400m back into the firm in the aftermath of the financial crisis in an ultimately vain attempt to save the business.

It was his own money, and if he had it today he would be enjoying retirement quietly, out of the lime light.

O'Reilly's great skill was to develop good companies around strong brands. He did it incredibly well. But his years at the top of the corporate pile coincided exactly with the era when tapping the debt markets was the global orthodoxy, widely regarded as best practice. Businesses that shied away from the loan markets risked getting left behind.

From a business perspective, debt is not always bad. For one thing financing a business with loans rather than common equity is very tax efficient – because the tax bill is worked out based on profits after interest. Access to debt allows businesses to grow fast, too, because they don't have to wait around for profits to accumulate.

But, loading debt on businesses, especially those where sales will fluctuate wildly based on the state of the wider economy, can be deadly.

Debt means interest, and interest has to be paid in bad times robbing businesses of flexibility just when it's most needed.

When the global financial crisis struck the impact was deadly, for businesses and for investors, and the bigger they come, invariably, the harder they fall.

Irish Independent

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