Monday 22 January 2018

Richard Curran: There's no rush to sell the rest of AIB stake unless price is right

The time is right to dispose of the State’s 25pc holding in AIB but it must avoid temptation and pressure to unload more stock. File photo: Bloomberg
The time is right to dispose of the State’s 25pc holding in AIB but it must avoid temptation and pressure to unload more stock. File photo: Bloomberg
Richard Curran

Richard Curran

'Every little helps' is the Tesco slogan and one that seems to apply when it comes to managing our gargantuan national debt. Currently running at around €200bn, the €3bn or so proceeds from the AIB flotation will only make a small dent in it.

However, not only do we have to start somewhere, but under EU fiscal rules, we can't use the AIB proceeds for anything else.

In a strange quirk of fate, we may end up slightly worse off in the short term by paying down some of the debt. As Joan Burton of the Labour Party pointed out last week, AIB is paying out a dividend of €250m per year. We will lose out on 25pc of that or €62.5m per year. The interest on €3bn of national debt over 10 years works out at about €30m per year. It may be a rather simplistic calculation but Labour was keen to emphasise the futility of selling off 25pc of AIB now when it could end up costing us money in the short term.

However, the rationale for selling a quarter or so of the bank now is pretty compelling. The markets are benign. It sets a market for the shares which will make it easier to sell down further stakes in the future. We are still trying to get back our €20.8bn. And this is the best way of ensuring the State gets the best price for the bank, as long as there isn't a rush to flog off the remaining 75pc.

The only dent in the logic of doing this now, is if it creates an undue momentum to sell more too quickly. If the share price falls, as happened when the State sold off 25pc of PTSB, there won't be a clamour to sell off any more for a while. However, if the share price holds up well after the IPO, pressure could come on from within the bank towards government to sell off more too quickly.

In the meantime, aspirations of using the proceeds to build infrastructure are not practical. Firstly, we are not allowed. Secondly, money isn't the problem when it comes to the housing crisis - its everything else.

Hoarders shall inherit the earth

Nama chief executive Brendan McDonagh, wasn't pulling his punches during the week when he blamed investors hoarding sites for the housing crisis. Well, he might as well blame developers, because developers are blaming Nama.

It is a little odd to sell off development sites at reduced prices and then lament the fact the buyers won't go ahead and build houses.

Michael Noonan has said the State cannot apply a "use it or lose it" approach to development sites because of legal difficulties. However, developers are not the only ones who might be accused of hoarding sites.

County councils haven't exactly been very active either. Just two of the country's county councils put up registers of vacant sites to be used as a basis for charging a special levy on not using vacant sites.

Dublin City Council and Donegal were the only local authorities to have even put up a register. Donegal's had just four sites on it, one of which is valued at just €32,000. Most of the Dublin sites are publicly owned.

Other local authorities have said they are compiling lists but haven't put up a register yet. You can hardly blame Leitrim County Council which has not received a planning application for a new housing estate in 10 years.

It is hard not to hold the suspicion that the government is actually quite relaxed about the house price rises caused by a lack of houses. After all one million of us own our homes, which are technically increasing in value, while there are just 50,000 people looking to buy a house.

Perhaps the new Taoiseach will tackle the public and private sector hoarders.

Toland's great Aryzta bake-off

September can't come quick enough for baked goods business Aryzta. That is when its new chief executive Kevin Toland is likely to start the job. Shares in the Swiss/Irish group fell again during the week after it warned that profit margins remain under pressure. Among the causes are declining sales and rising labour costs in the US. It seems that several factors are driving up wage costs in the US, including greater enforcement of migrant work permits.

The Trump era (although greater enforcement began before Trump was sworn in) has left many companies having to offer permanent full-time jobs where in the past many labour gaps were plugged by temporary workers. This is driving up wage costs.

Some of them have been working and paying tax in the US for years, but the crackdown is seeing employers of lower skilled labour across the US facing higher wage bills for more permanent staff.

Aryzta has been doing some soul-searching in recent months by examining its strategic options and its business model - should it be business to business or business to consumer.

With a management vacuum at the top executive level, at least until the autumn, it is taking longer to get decisions made. One of Toland's first tasks will probably be to green light the sale of Aryzta's French frozen food business Picard, which it owns with Lion Capital.

After that he will need to look at all of the options regarding achieving greater efficiencies, disposing of more businesses and driving sales. Aryzta's share price has halved in the last two years. But given the scale of the share price fall, Aryzta might become an attractive proposition for a takeover once things have stabilised. The sale of Picard will improve the balance sheet. There are still too many unknowns but with a degree of certainty and stability, Toland could end up fending off an opportunistic bid.

Water infrastructure plan won't float

Whatever about a new Aryzta CEO, it appears that Bord na Mona boss Mike Quinn will take over the job as chief executive of Ervia, the state company that manages the gas network and Irish Water.

It's one thing charging gas suppliers for using the network, but the plan for financing water infrastructure doesn't look like it will float.

It isn't actually Irish Water's fault, but politicians who agreed the new charging, sorry, non-charging, regime. The only plan available for financing Irish Water's necessary €5.5bn capital investment programme up to 2021, is that the money will come from central exchequer funding.

The state utility needs to spend around €13bn on water infrastructure and treatment in the years over an extended period.

Without very explicit costed commitments from government about how Irish Water will be able to find the money to plug, for example, the 44 locations where untreated waste is going into rivers and ports, it will be vulnerable to political mood swings and shifting priorities.

Quinn will need to use any political connections - or at least be good at persuading politicians - because he will end up in a constant process of lobbying government to come up with the necessary capital spend.

Sunday Indo Business

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