Friday 23 February 2018

McCarthy back on a winner

Appointment of former Ulster Bank boss as chief financial officer is a gamble by Paddy Power to help its fortunes in US

This week, in what was one of the greatest comebacks in Irish commercial history, former Ulster Bank boss Cormac McCarthy returned to the front stage of Irish business when he was appointed chief financial officer of quoted bookmaker Paddy Power.

He's back! In a resurrection worthy of Lazarus himself, Cormac McCarthy, who quit as Ulster Bank boss in July 2010, is the new CFO of Paddy Power. He becomes an executive director of Ireland's ninth most valuable Stock Exchange-listed company with a market value of over €2.4bn.

It all seemed so different two years ago. Mr McCarthy became the latest casualty of the Irish banking and property bust. However, unlike some of the other former bank bosses, Mr McCarthy left voluntarily and received no redundancy or compensation package.

While as a foreign-owned bank, Ulster sold none of its bad loans to NAMA and didn't cost the taxpayer a cent to recapitalise, it has cost its UK parent bank RBS dear. It has been estimated that RBS has had to pump up to £10bn (€12.5bn) of fresh capital into Ulster Bank in order to keep its Irish subsidiary afloat.

By the first quarter of 2012 Ulster Bank had written off a total of £4.2bn in bad loans. It has also transferred £15bn, about 30pc of its peak loan book, to an internal 'bad bank'.

It was Ulster Bank which funded one of the iconic transactions of the Celtic Tiger era when in 2005 it lent property developer Sean Dunne most of the €380m which he paid for the Jurys and Berkeley Court Hotels in Dublin's leafy Ballsbridge suburb.

A consortium of banks led by Ulster Bank is currently pursuing Mr Dunne seeking the repayment of €163m from him on foot of personal guarantees which he gave to his lenders at the time of the Jurys/Berkeley Court deal.

Meanwhile, the situation at RBS, of whose executive committee Mr McCarthy had been a member and of whose UK retail operations he had been deputy chief executive, was even worse.

RBS came within hours of going bust in September 2008 and had to be bailed out by the UK taxpayer to the tune of £45bn, a move which resulted in the British government ending up with an 82pc stake in RBS.

However, unlike many of the other former Irish bank bosses, Mr McCarthy never became a national hate figure. While the likes of former Anglo boss Sean FitzPatrick and his Irish Nationwide Building Society counterpart Michael Fingleton rapidly became infamous, such public opprobrium never attached itself to Mr McCarthy.

Of course it helped that the cost of his mistakes was borne by British rather than Irish taxpayers.

But that almost certainly wasn't the only explanation. Even at the height of the boom, while there were many who were prepared to bad-mouth some of the other bank bosses, Mr McCarthy was generally well-regarded with those who worked for him praising his collegiate style of management.

Whatever the explanation, Mr McCarthy managed to survive the banking bust without acquiring a toxic reputation. Which, given the fate of some of the other former bank bosses, speaks volumes about the high regard in which he is still held.

In September 2011, five months after handing over the Ulster Bank reins to Jim Brown, Mr McCarthy resurfaced when he was appointed a non-executive director of Paddy Power. Quite clearly Mr McCarthy was not persona non grata in corporate Ireland.

With the benefit of hindsight this should have alerted market observers to the possibility that he would go on to greater things at the company.

Paddy Power has a history of promoting non-executive directors to executive roles. In September 2005 Patrick Kennedy, who had been a non-executive director for the previous year-and-a-half, was appointed Paddy Power chief executive.

That is not the only thing which the two men have in common. Like Mr Kennedy, Mr McCarthy is also a chartered accountant, and the two men qualified with the same firm KPMG although, as Mr Kennedy is eight years younger than Mr McCarthy, their paths never crossed at Ireland's largest accountancy practice.

In his new role Mr McCarthy is effectively replacing Jack Massey, Paddy Power's current finance director. In an awkwardly-worded statement, the company announced that Mr Massey had been appointed "director of finance and company secretary".

However, the statement goes on to say that Mr Massey will be stepping down from the board "on assuming the role of company secretary" with no mention of his continuing as director of finance. This is at best a sideways move for Mr Massey who has been Paddy Power finance director for the past six years.

The timing of the announcement of Mr McCarthy's appointment was also somewhat unusual. The company issued a statement announcing Mr McCarthy's new job on Wednesday, just six days after its AGM. Why not take the opportunity of the AGM to make the announcement directly to shareholders?

At the AGM Mr Kennedy pledged that Paddy Power would not be left behind as the United States gradually legalises internet gambling, particularly online poker. Already Nevada, the home state of gambling Mecca Las Vegas, has legalised online poker with California and New Jersey set to follow suit.

In the early days of online poker Mr Kennedy studiously avoided the potentially lucrative American market. With the legal situation uncertain, Paddy Power wisely decided not to pick an unwinnable fight with Uncle Sam. It has, however, won a contract to supply gambling services to the provincial lottery of the Canadian province of British Columbia.

While the United States lost a WTO case brought by the Caribbean island-state of Antigua, where many of the early online poker sites were based, it still succeeded in shutting most of them down and seizing their assets. Changes in federal legislation have also made it virtually impossible for US residents to use their credit cards on unauthorised offshore gambling websites.

While the Feds represented their crackdown on internet gambling as being motivated by a desire to protect innocent US poker players, an oxymoron surely, the reality was somewhat grubbier.

What happened was that the existing US gambling sector, both legal and otherwise, furiously lobbied Congress and successive administrations to put these new offshore competitors out of business.

Given this previous history any would-be entrants to the US internet gambling market can expect to have their credentials rigorously examined. Could Mr McCarthy's less than stellar performance at Ulster Bank be dredged up and used against Paddy Power, which is currently awaiting a reply from the Nevada Gaming Commission on its application for a licence to supply and operate mobile gambling equipment in the state? You betcha!

Clearly Mr Kennedy is gambling that the advantages of recruiting an undoubted heavy-hitter such as Mr McCarthy will outweigh any possible disadvantages.

As the company transitions from being a small Irish quoted company to an international gambling colossus, it needs to beef up its management team to meet the new challenges, financial, legal and technical, that lie ahead.

If Mr Kennedy is right then his new finance director will have the opportunity to restore his once-stellar reputation much sooner than anyone could have bet at the time he announced his intention of leaving Ulster Bank back in July 2010.

Irish Independent

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