Sunday 21 January 2018

Dan White: Taxpayer once again the loser in Irish Life sale

The State would have got more if it sold at a later date but Dan White suspects the troika was in a hurry

Dan White

Dan White

AS a forced seller, the Government got a poor price for Irish Life. If it had had the luxury of waiting, there is little doubt but that it would have been able to sell Ireland's largest life and pensions company for far more than the €1.34bn which it received last week.

Irish Life has effectively been up for sale ever since the 2011 bank stress tests revealed that its then parent, Irish Life and Permanent (IL&P) needed to plug a €4bn hole in its balance sheet. The original plan was to float Irish Life off as a separate company and use the proceeds to reduce the cost to the State of recapitalising IL&P.

Unfortunately it very quickly became clear that, in the aftermath of the EU/IMF bailout, most investors just weren't interested in the shares of Irish financial services businesses, even one as relatively healthy as Irish Life. When that didn't happen the Government 'purchased' Irish Life for €1.3bn in 2012, with the proceeds forming part of the €4bn taxpayer-funded recapitalisation of IL&P.

Even before the State purchase, a trade buyer was being sought for Irish Life. A sale to Great-West Lifeco of Canada, which already owns Canada Life in this country, for €1.3bn was on the point of being agreed in November 2011 when the worsening eurozone crisis caused the Canadians to get cold feet at the last moment.

There were no such hiccups last week, when the Canadians finally agreed to buy Irish Life for €1.3bn with the Government also in line to get a €40m dividend.

So what are the Canadians getting and did the Government negotiate a good deal for the taxpayer? With a 29 per cent market share in life and pensions, 33 per cent in fund management and over one million customers, Irish Life is by far the biggest player in the Irish life and pensions market.

At the end of June 2012 it had an embedded value of €1.8bn. Irish Life recorded full-year operating profits of €110m in 2011 and a further €90m for the first half of 2012, a 30 per cent increase on the same period the previous year.

The merged Irish Life/ Canada Life, which will trade under the Irish Life name, will be the 800lb gorilla of the Irish life and pensions market. It will have a market share of close to 40 per cent.

Following the deal just three providers, Irish Life/Canada Life, BoI-owned New Ireland (which is also up for sale) and Zurich, will dominate the market with a combined 85 per cent share.

Under normal circumstances, it is difficult to see how last week's deal being approved by the competition authorities.

The sale of Irish Life further cut the cost to the taxpayer of the various bank bailouts, which at one stage stood at €64bn.

While any such reduction is to be welcomed, that does not necessarily mean the taxpayer got a good deal. Even if one includes the €40m dividend, Great-West Lifeco bought Irish Life at a 25 per cent discount to its embedded value.

By comparison, Standard Life, a broadly comparable business, has a market capitalisation of £8.2bn (€9.5bn) at the current share price, a 5 per cent premium over its embedded value of £7.8bn at the end of June 2012. If Finance Minister Michael Noonan had been able to squeeze a comparable valuation out of Great-West Lifeco, he would have delivered another €550m for the taxpayer.

However, the State has recouped all of the €1.3bn it paid for Irish Life. Even so, the minister describing the Irish Life sale as a "historic transaction" is surely laying it on a bit thick.

So why didn't Mr Noonan simply hang on to Irish Life until market conditions improved and sell it later for a higher price? The truth is that he probably didn't have much choice in the matter.

He alluded to this reality when stating that: "We aren't investment managers or [we don't] run hedge funds. The policy is to take out what was put in at par without any further risk."

Which, translated into plain English, probably means that the troika was pressing for a quick sale and, in today's Ireland, the troika gets what the troika wants. With the troika pressing for a quick sale, Mr Noonan was effectively a forced seller. By selling Irish Life sooner rather than later, the taxpayer was almost certainly the loser.

Irish Independent

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