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DOWN ABBEY ROAD

This week's vote by Abbey shareholders to allow the company to buy back up to 14.99pc of its shares marks another stage in the creeping takeover of the house-building company by its chairman Charles Gallagher.

Although it has been a quoted company since 1973, Abbey is still very much controlled by the founding Gallagher family. The Gallaghers currently own 35.2pc of the company. As the Gallaghers have already declared that they won't be selling any Abbey shares, the family shareholding could rise to as much as 41.4pc if the company buys the full amount of shares approved by shareholders this week.

Originally from Tubercurry, Co Sligo, the Gallaghers are one of the great dynasties of the Irish construction industry. Charles Gallagher's father, Charles Gallagher Senior, was one of seven brothers. Most of the brothers emigrated to the UK in the 1930s and 1940s and gradually worked their way up through the ranks of the UK building industry. In a tough business the Gallaghers were tougher than most.

Following their success in the UK, some of the Gallaghers returned to Ireland in the 1950s and set up their own house-building company, Abbey. The company was floated on the Irish Stock Exchange in 1974, at the tail end of the 1960s-and-early-1970s housing boom. The family also established a separate property development company, the Gallagher Group.

Abbey's first dozen years as a quoted company were controversial to say the least. Charles Gallagher Senior was the company's chief executive when it first went public, but he was soon forced out by other family members. He returned to the UK and spent most of the following decade quietly developing his own house-building company, Matthew Homes.

Meanwhile, other members of the extended Gallagher family were busy hogging the headlines. The Gallaghers have always been closely identified with Fianna Fail and one of the brothers, James, served as a Fianna Fail TD for Sligo-Leitrim between 1961 and 1973 and again from 1977 to 1981.

However, it was the deeds of another of the Gallagher brothers, Matt, and his son, Patrick, which were to guarantee the Gallaghers their place in the folklore of Irish business. It was Matt who first suggested to a newly elected Fianna Fail TD, Charles Haughey, that he buy a house and its surrounding lands at Grangemore, Raheny for £13,000 (€16,510) in 1959. The Gallagher Group bought the house and lands for £260,000 (€330,200) in 1969. It was this money that allowed Haughey to buy Abbeville, which he was to sell to Manor Park Homes for €43m in 2003.

When Matt died in 1974, his son, Patrick, took over the running of the Gallagher Group. Like his father, he too was one of Haughey's major financial supporters. In December 1979, he paid Haughey, who had been elected Taoiseach a few days earlier, £300,000 (€381,000).

Allegedly a deposit on land which Haughey was to sell to the Gallagher Group, the sale never went ahead and the money was never repaid.

In April 1982, the Gallagher Group went spectacularly bust, an event that was seen by many in retrospect as marking the beginning of the grim 1980s recession.

Both Charles Gallagher Senior and Junior have preferred to adopt a much lower-key style than other members of the Gallagher family.

While the English-educated and accented Charles Gallagher Junior ran unsuccessfully as a Conservative candidate in the rock-solid Labour constituency of Don Valley in Yorkshire in the 1987 general election, both father and son have generally opted to stay out of the limelight and get on with running their businesses.

By 1983, Abbey was going nowhere. The share price had fallen to just 30p (€0.38) from a launch price 96p (€1.22) nine years earlier. In fact, when the extremely high inflation of the mid-to-late-1970s is taken into account, the Abbey share price lost about 90pc of its value in real terms during those years.

With the share price in the doldrums and the fortunes of the extended Gallagher family severely depleted by the collapse of the Gallagher Group the previous year, most observers expected that Abbey would quickly fall when UK house builder French Keir lobbed in an opportunistic 50p (€0.63) per share bid for the company. The fact that most of the Gallaghers, who between them owned 64pc of the company supported the bid, seemed to place the result beyond doubt.

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All that stood between French Keir and success was Charles Gallagher Senior, who owned just under 30pc of the company. In September 1983, he was elected chairman and against the odds thwarted the bid.

Once he had regained control of Abbey, he ruthlessly pruned back the company's Irish activities and focused instead on the UK, which was then enjoying the early stages of the Lawson boom. In fact, although the company has retained its Irish listing and denominates its accounts in euro, Abbey has been effectively a UK company since Charles Gallagher Senior regained control. While the group re-entered the buoyant Irish housing market in recent years, 457 of the 677 houses it sold last year (67pc) were in the UK.

In 1986, Charles Gallagher Junior, who was then just 26, joined the Abbey board. In 1993, he took over as executive chairman following the death of his father. Under his leadership, Abbey has delivered steady rather than spectacular growth.

He has increased Abbey's sales from €78m in the year ended April 1997 to a peak of €207m in 2005 before falling back to €192m in the year to April 2007.

Over the same period, the group's pre-tax profits have risen from €11.5m in the year to April 1997 to a high point of €60m in 2004 before dropping back to €45m last year.

Abbey's sales and profits are likely to be down again this year. At this week's EGM, Gallagher warned shareholders that house-building activity had been hit by the global credit crunch.

As well as running Abbey, for which he was paid €967,000 last year, Charles Gallagher also manages Matthew Homes, the company founded by his father after he had been ejected from Abbey in 1974. According to the most recent accounts, which are for 2005, Matthew Homes had a turnover of €96m and pre-tax profits of €39.5m as well as paying its shareholders a dividend of €14.4m.

Add these dividends to the €3.6m in dividends which it received from Abbey last year and it can be seen that Charles Gallagher's branch of the Gallagher family is seriously rich. Its wealth has been estimated by the 'Sunday Times' rich list at stg£230m (€320m).

However, the fact that Charles Gallagher simultaneously manages a quoted company and a family-owned company operating in the same sector has inevitably led to fears of a potential conflict of interest. In fairness to the Gallaghers, both father and son, they seem to have managed this conflict quite successfully for the past quarter of a century.

One way of solving this problem would be for the Gallaghers to buy out the non-family Abbey shareholders. With the share price having fallen by over 50pc to under €6 this year this could be done for just €110m. So why aren't the Gallaghers doing this?

But they are. Last year, the family raised its shareholding from 29.8pc to its current level of 35.2pc. Assuming the share buy-back goes according to plan, the family shareholding will rise again to over 41pc. At that level, the family's grip on the company will be completely unbreakable.

What we are witnessing at Abbey looks very like a slow-motion takeover. By buying back shares when the share price is weak, Charles Gallagher is gradually taking out the other shareholders without having to shell out a hefty takeover premium.

While only Charles Gallagher has any idea of how long it will take, we are now into the end-game at Abbey. Some time over the next few years, he will the take the company, first floated on the Stock Exchange by his father 33 years ago, private once again.


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