Friday 21 September 2018

Richard Curran: Hedge funds got a bargain with former Quinn cement operations

Norwegian enjoyed passenger growth of 14pc last year but is now burning through cash just as it gets transatlantic routes up and running Photo: Bloomberg
Norwegian enjoyed passenger growth of 14pc last year but is now burning through cash just as it gets transatlantic routes up and running Photo: Bloomberg
Richard Curran

Richard Curran

The consortium that bought Sean Quinn's former cement and plastics operations got a real bargain from the receivers back in 2014.

Quinn Industrial Holdings is run by a local consortium of businessmen and former Quinn Group executives but it is majority owned by some pretty sharp US hedge funds.

The local group - led by businessmen John McCartin, Ernie Fisher and John Bosco O'Hagan - bought this part of the former Quinn operations for €98m back in December 2014.

During the week, the group put out summary financial statements which showed that it grew pre-tax profits last year by 59pc to €10.8m. This was on the back of a 7pc increase in turnover to €209m. Operating profits shot up 48pc to more than €14m.

These are headline figures but they show what a solid business it is, provided it can ride the benefits of economic growth in Ireland without being detrimentally affected by Brexit on either side of the Border or the Irish Sea. The group is exporting across to England from Warrenpoint Harbour.

So how much is Quinn Industrial Holdings (QIH) worth, given that it was bought for €98m just over three years ago?

According to QIH's full accounts for 2015 and 2016, its tangible assets were valued at €113m. But it booked around €30m of "negative goodwill". This is defined as arising "on an acquirer's financial statements when the price paid for an acquisition is less than the fair value of its net tangible assets. Negative goodwill implies a bargain purchase and the acquirer immediately records an extraordinary gain on its income statement".

The owners may have got it at a very good price, but it takes know-how, and presumably local support, to make these profit numbers. In its first year of new ownership, QIH managed to slice €9m off its administrative bill while also hiring an extra 30 staff. It now employs 800 people.

It has made €21.6m in pre-tax profits in the first three years of operations under new management. But the big winners here are the hedge funds who bought around 80pc of the business and funded the deal - Brigade Capital, Contrarian Capital and Silver Point Capital.

QIH had borrowings of around €102m at the end of 2016 and was paying interest to these financiers of 10pc a year on €59m of it. Its lenders had received €16m in interest in the first two years of ownership.

QIH is confident of growing further and is investing and hiring all the time. It is spending another €3m on a fleet of 33 new cement trucks. The hedge funds can continue to get their 10pc return on loan notes right up until 2024. Who knows what the business could be worth by then?

IAG route to low-cost success may well prove O'Leary right

If you want to skip the queue to get on board a low-cost flight more quickly, you have to pay a little more. Is IAG's Willie Walsh trying to board low-cost, long-haul success without paying anything extra with his interest in Norwegian? The chief executive of IAG has never lacked ambition when it comes to expanding the group. Having put BA together with Iberia, facing down unions in Spain, he has added Vueling and Aer Lingus to the IAG group.

At first glance, his timing for a move on Norwegian Air looks perfect. The group has been enjoying passenger number growth but its share price has fallen because of concerns about the strength of its balance sheet in the face of its expansion plans.

Walsh landed IAG on the Norwegian share register by buying a 4pc stake and then went on to clearly indicate his interest in a bid, even though talks have not yet taken place.

Several major airlines have been experimenting with the idea of long-haul, low-cost operations, and IAG has launched its own low-cost service called Level. It operates from Barcelona and Paris to destinations including Los Angeles, Boston and Montreal.

Analysts believe Norwegian is a good fit because it will take IAG a long time to get the long-haul, low-cost model right on its own. However, has Norwegian got it right yet either? It built its success on becoming the number three low-cost airline in Europe after Ryanair and Easyjet. It carried around 33 million passengers last year, a 14pc increase on the previous year.

But there is something unproven about the this model. Determined to push ahead into cheap long-haul air travel, Norwegian placed one of Europe's biggest ever orders for new jets back in 2012.

Now, six years on, it is burning through cash at a time when it is still just getting transatlantic services up and running.

It is relatively early days for such a new model. Even after its 37pc share price surge on Thursday, Norwegian was still only valued at $1.2bn.

Perhaps Walsh believes he can take a fast track to low-cost, long-haul with Norwegian and still snap up Europe's third-biggest low-cost airline at the same time for a modest price. Greater consolidation in European airlines is expected and this is seen as another logical step. But the market only marked up IAG shares by 1pc on Thursday. Not everybody is convinced.

At some point in the past, Ryanair's Michael O'Leary must have been tempted to do what Norwegian did - use low-cost, short-haul success to have a crack at long haul. But O'Leary was smart enough to stick to the knitting and what works for Ryanair. Now IAG is circling Norwegian. Once again it looks like O'Leary got it right.

Weston Arnotts investment is more than just cosmetic

The Weston family is certainly putting its money behind Arnotts. The 175-year old Henry Street store is to undergo another investment. Its parent group, Selfridges, owned by Galen and Hilary Weston, is to pump another €11m into the business for a major makeover, one top of €4m made available for improvements last year.

One quarter of the money will be spent on the cosmetics section, which already received investment of €1.25m.

Undoubtedly Selfridges is taking Arnotts more upmarket at a time when Irish consumer spending is racing towards record levels and more shoppers want luxury. Arnotts has added Mac make-up, Jo Malone, Charlotte Tilbury brands and now plans a toy store. All sounds very posh.

The other big area of investment is online. Selfridges also owns Brown Thomas. I went in there the other day - for research purposes only - and couldn't miss the big sign on the door as your enter the store. It says 'Shop online at Brownthomas.ie...'. It might seem counterintuitive to invest massively in the physical stores while also encouraging your customers to go online.

But Selfridges is taking the view that lots of punters are going to go online anyway, so they might as well go to its website. I checked the price of several items in the store and then checked on the website. It was exactly the same.

The Westons are backing both city centre bricks and mortar, together with online.

Sunday Indo Business

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