Wednesday 26 September 2018

Davy mulling share buyback to incentivise top earners

Sources said Davy offers stakeholders the option to cash in their shares every year but take-up rates are sluggish since few believe the group's enterprise value of about €500m reflects its future value-creation potential. Stock photo: Reuters
Sources said Davy offers stakeholders the option to cash in their shares every year but take-up rates are sluggish since few believe the group's enterprise value of about €500m reflects its future value-creation potential. Stock photo: Reuters

Gretchen Friemann

The country's biggest stockbroker, Davy, is understood to be mulling a plan to buy back and cancel some shares held by former executives, in a move that would help enlarge payouts for existing employees, particularly in the event of a sale.

According to sources close to the broker, about 20pc of its share register is in the hands of former executives, which limits the share of payout to the current generation of 'rainmakers' if the business is sold or reconfigured.

The number of existing and former employees who hold shares in Davy has more than doubled to 200 since a 2006 management-led buyout, while the broker's headcount has expanded to over 600.

It is understood this overhang of former executives on the register is a bugbear for some current staff, as ex-employees are seen by some as standing to benefit from the fruits of their successors' labour.

Sources said Davy offers stakeholders the option to cash in their shares every year but take-up rates are sluggish since few believe the group's enterprise value of about €500m reflects its future value-creation potential.

This conviction that the shares remain undervalued has gained even greater currency following the bid for smaller rivals, Goodbody stockbrokers and South African-owned Investec.

Goodbody has attracted an offer of close to €150m from Chinese suitors while Investec Ireland may be offloaded to AIB for between €50m to €70m.

Any takeover of Davy would be a far meatier proposition. Over the past decade, the Dublin-based broker, which traces its roots back to 1926, has expanded its franchise into the UK and ramped up its private wealth arm aggressively, with assets under management now close to €16bn.

Yet while the business is benefiting from the wider economic recovery, the legacy of the crash continues to cast a shadow with sources claiming that annual bonuses remain near crisis-era levels.

Goodbody's management are predicted to make about €60m in cash and earn-outs from the Chinese investors' buyout deal, with both parties set to exchange contracts on the transaction shortly.

For Davy's shareholders however, the day of reckoning may be some years away as management have set their sights on further growth and are mulling another batch of bolt-on acquisitions.

The nation's largest broker is reportedly running the rule over Saunderson House, an investment adviser owned by IFG.

As the group pitches for greater growth, some shareholders have questioned whether it will offer a higher valuation for the previous employees' shares.

Davy will reap a €60m to €70m windfall from its stake in the Irish Stock Exchange when its sale to Euronext concludes shortly.

That will fortify its cash reserves, bringing the balance to about €200m.

In 2015, Davy repaid its employees about €40m linked to loans dating back to the buyout. The repayment represented a return of 1.8 times, including interest, on the money workers lent to the company to help finance its leveraged buyout from Bank of Ireland.

Staff were also offered the option of selling their shares at eight times their 2006 value, although it is understood relatively few opted to cash in the stock.

Irish Independent

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