Sunday 15 September 2019

Richard Curran: 'State missed €2.6bn opportunity by not selling more AIB shares'

Bernard Byrne, then chief executive of AIB leaving the Department of Finance after meeting with finance minister Pascal Donohoe
Bernard Byrne, then chief executive of AIB leaving the Department of Finance after meeting with finance minister Pascal Donohoe
Richard Curran

Richard Curran

Former AIB chief executive Bernard Byrne has a very strong case for saying to the Government: "I told you so." Back in 2018, when AIB shares were trading at around €5.50, Byrne suggested that it would be a good idea for the State to sell down its 71pc shareholding in AIB further. He suggested that the total value of cash received by the State from share sales, dividends and the cost of the guarantee, combined with the value its remaining 71pc stake would have, equated to the €20.8bn the Government had sunk into the bank during the financial crisis.

It was a good time to get out. AIB shares at the time were trading at almost double their current level. Byrne took the unusual step of advocating a further share sale publicly, which attracted the ire of Finance Minister Paschal Donohoe.

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European bank shares have had a torrid time this year, and in an Irish context, AIB has taken a real pounding. Around €3.5bn has been wiped off its market capitalisation since January, which has reduced the value of the State's stake by around €2.5bn.

The value of the State's shareholding in Permanent TSB has plummeted around €215m, and its 15pc of Bank of Ireland has fallen in value by around €270m.

But before jumping to the obvious conclusion that the Government has missed the boat on an AIB sell-off, a wider question has to be asked. Why did it want to keep the shareholding in the first place? And does it really need to sell at all?

Byrne was looking at a purely financial or economic equation when he suggested that January 2018 was a good time to sell.

He didn't have a crystal ball about the future, but could see an opportunity for the taxpayer. Politics is more than economics. The Government was smarting from the publicity that banks had ripped people off once again through the tracker mortgage scandal, and that former State assets (held by Nama) had been sold too quickly and cheaply.

The opposition would have jumped all over Fine Gael if it had fully privatised AIB. The tracker mortgage scandal showed that banks and bankers still needed not only to be regulated, but controlled by shareholders.

So there were alternative reasons for keeping the stake at the time. There is also the question of what the Government would have done with the proceeds. It has struggled to run up surpluses during an economic boom in recent years. It could have used some of the money to pay down debt. This might have looked good but the cost of borrowing for the State is near record lows.

The shareholding in the banks is held through a State investment fund and it doesn't need the cash in a hurry. Then there are the dividends which have been received from holding on to the stake at a 71pc level.

Yet the fall has been significant and it is hard to see what factors are suddenly going to come into play in the short to medium term which will significantly lift the share price to nearly double its current level - even if the Government is not in a hurry for its cash back. All of the above could have been achieved if the State had sold down its AIB shareholding to 51pc. It could have bagged another €3bn in cash and retained a majority share in the bank. If it sold a further 20pc today, to bring the shareholding down to 51pc, the State would receive about €1.3bn, or close to €1.8bn less. That would build you a lot of rural broadband, or even a national children's hospital.

Brokers take bite out of Aryzta

Just when management at bakery giant Aryzta settle on a course of action, something else blows up which challenges the company's turnaround plan. This time, it is concerns about a European slowdown and a growing consumer food trend away from sugary buns.

Having seen the share price collapse and buckle under its significant €1.5bn debt pile, Aryzta decided to bolster the balance sheet with a massive €790m share placing and a three-year cost-cutting programme.

It was also going to sell its 49pc stake in French food group Picard as a way of bringing in around €200m in cash towards debt reduction.

The cost-cutting plan is within the gift of management, under CEO Kevin Toland, to execute. Being on the wrong side of consumer food trends is harder to fix. It can be done through acquisition (needs money) or more gradual product development (needs time). The consumer trend is toward health snacking, while 40pc to 45pc of Aryzta's group sales stem from sweet baked goods, according to a UBS analyst.

Shares in Aryzta slumped to an all-time low on Thursday of 68c CHF after two brokerages highlighted risks in the company's turnaround plan.

UBS and Credit Suisse suggested that while Aryzta will meet its cost-cutting target of €90m in savings in three years, it isn't necessarily a growth story. UBS slashed its share price target by 41pc, to 80c CHF.

Meanwhile, a Credit Suisse analyst said the recent European economic slowdown is concerning, and North America remains a challenging market. Aryzta has relied on dividends from the very profitable 49pc stake it has in Picard, and while it has been on the block for some time, it has yet to be sold. When a buyer emerges, will Aryzta be cutting off the hand that feeds it?

Aryzta chairman Gary McGann and Toland faced some real challenges when they took over. McGann has been in the job since September 2016 and Toland since May 2017. That honeymoon is well and truly over.

You just can't find an auditor when you need one

Sports Direct boss Mike Ashley should put an ad in a local Newcastle newspaper: "Auditor wanted for very large, reliable, transparent and solid sports retail chain."

The publicly quoted company saw its share price tank after its auditor Grant Thornton decided not to continue in the role. This came after Sports Direct was hit with a €674m tax bill in Belgium.

Grant Thornton said it was not told about the tax bill until just before it was due to sign off on the accounts.

The company has just one month to find a new auditor and believes it can only be serviced by one of the big four audit firms.

So far, it isn't having any luck landing one, with various firms citing conflicts of interest or other reasons for not taking on the new client.

In an unusual move, under British law, the business secretary has to impose an auditor on the firm if it cannot get one itself.

The wider reality here is that Sports Direct is not a suitable publicly listed company. Ashley owns 62pc of it and has made some expensive mistakes with acquisitions and other very public errors.

This means he is making mistakes with shareholders' money, which is 62pc his and 38pc somebody else's. The firm's shares fell to 214p last week, when they had been trading at 922p five years ago.

If Ashley believes so strongly in the company and the brand, he should take the firm private at these stock levels, buy out the other 38pc, and do what he wants with his own money.

He would also shed all of these very "cumbersome" stock exchange rules.

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