Business Irish

Sunday 17 December 2017

Richard Curran: 'Tis the season for giving (again) to the leaders at Eir

Eir's offices Pic: Mark Condren
Eir's offices Pic: Mark Condren
Richard Curran

Richard Curran

It's the company that keeps on giving - to its executives that is. Another stock market flotation for Eir (formerly Eircom) and another big executive pay day looms. Company filings in Luxembourg show that senior executives and management are in line to receive payouts of up to €181m for their shares in the company when it returns to the stock market, possibly next year.

It's a lot of money for a management team but reflects the fact that they own around 15pc of the company and the size of the payout will depend on the value placed on Eir by the market when it does begin trading again on the stock market.

This is part of a long-standing tradition at the former state telco, where executives land very generous share and/or bonus payments whenever it floats. This will be its third IPO.

Back in 1999, then chief executive Alfie Kane wasn't allowed any shares in the business ahead of its privatisation, because, well that might not have looked good. Instead, it emerged after the flotation that he and his finance director shared bonus payments totalling €1.2m.

Fast forward to 2003 and Eircom has new owners and a new management team led by ceo Phil Nolan. The company is smaller, but the payola is even bigger.

Nolan received a signing-on bonus and shares of €2m when he took up the job in 2001. But in 2003, four senior executives shared €11.5m in bonuses for re-financing the company's sizeable debt.

They then bagged multi-million euro share option packages when Eircom floated in 2004. Fast forward to 2014 and Eircom ceo Herb Hribar received the bulk of a €9.8m "termination payment" given to departing executives when plans for an IPO were shelved. The company also spent an estimated €14m buying shares in a bonus scheme from exiting management.

Some Eir executives in the management team, which is led by ceo Richard Moat, could also have benefited from a liquidity event in 2015 when the company purchased some management shares, worth €56m, using cash or other classes of shares depending on their personal preference.

There is a definite pattern and it seems to say that landing a top job at Eir is better than winning the lottery. If you re-finance its massive debt, you get a bonus. If it floats, you get a bonus. If it doesn't float, you get a bonus. If your contract is terminated, you get a big cheque then too.

In fairness to Moat and his team, they have handled the post-examinership turnaround at Eir extremely well and have put the company on a much more solid footing.

They also landed their shareholding in the company at a time when the outlook for the telco was not nearly as bright.

Of course, the other really big winners in the Eircom corporate adventure were the staff. But that's another story.

Trump will sow the seeds of a new boom/bust

US president-elect Donald Trump has used his Twitter account to bully Ford into pulling its plans for a $1.6bn (€1.5bn) factory in Mexico and invest $700m in Michigan instead. By threatening to put a big border tax on cars imported from Mexico, Trump has forced Ford to blink first.

Toyota and Honda, the third and fifth biggest players in the US car market, are holding out a little longer by saying they will decide on their future plans for Mexican investment, when they see Trump's policies. Toyota is planning a new Mexican factory which will produce Corollas from 2019.

Trump can't force their hand unless he is prepared to tear up the North American Free Trade Agreement (NAFTA) between the US, Canada and Mexico, which has been in place for over 20 years.

The US exported $55bn worth of cars around the world in 2015. Mexico exported $33bn and Canada exported $45bn worth. America has become the big market for cars made in Mexico and Canada.

By making its new Focus in Michigan, Ford has signed up to a higher cost base, and therefore a more expensive car to sell. Unless its competitors do the same, Ford won't sell as many Focus cars in the future, even if it goes big on a 'made in America' marketing campaign.

The real play here is that Trump plans to subsidise higher cost manufacturing in the US, by cutting Corporation Tax. That might work, except somebody still has to pick up the tab.

He will end up using public money taken from elsewhere and higher exchequer borrowing to subsidise higher cost manufacturing at home, in order to make bold announcements about American jobs.

Americans will end up picking up the tab anyway. It might work in the short term, but it has all the ingredients of a classic boom/bust a few years down the road.

The great dairy crisis has quietly disappeared

Farmers are very adept at crying over milk - not when it is spilled, but when they get less than their 28c per litre average cost of production.

Predictions of a dairy doomsday or agricultural apocalypse over falling milk prices abounded not so long ago, but they have quietly gone away. In 2015 and the first half of 2016 farm lobby groups were talking about insolvencies in dairy farming because milk prices had fallen to 4p below break-even point for many farmers.

The situation has changed quite a lot since then. Irish milk prices look set to break the 30c per litre price and Teagasc recently predicted that average dairy net margins should hit €1,200 to €1,400 per hectare in 2017.

The average net margin in 2016 was just €795, so this year could see an increase of 58pc to 78pc. The increase is on the back of predicted milk price rises of 15pc to 20pc according to Teagasc and a further 6pc rise in the level of milk production as more farmers ramp up.

Crisis - what crisis?

Can our Corporation Tax billions keep on coming?

How dependable are our ever-rising Corporation Tax receipts? It sounds like a question on a rather nerdish academic paper. But it is becoming more and more pertinent to all of us.

Corporation Tax receipts came in €739m ahead of expectations in 2016 and hit €7.3bn. The haul was €2.3bn above expectations the previous year, which puts us €3bn above target in just two years.

But just how many companies are paying how much of the extra and why, remains something of a mystery. Revenue published some additional information about this phenomenon last year, which showed 80pc of the Corporation Tax take in 2015 came from multinationals. How reassuring is that?

The exchequer finances overall showed what a strong year it had been in terms of tax take, as the State took in more money in tax than ever before.

Nobody will celebrate this little fact more than public service trade unions looking for pay rises. They won't hesitate to ask questions about how sustainable it all is.

The public finances do seem to depend on a growing Corporation Tax take that few really understand. Income tax was also up around €760m at €19.1bn but VAT, a good barometer of consumer spending and activity, was higher than in 2015, but still over €400m behind expectations.

With so many external pressures on reforming Corporation Tax, we can't afford to become too dependent on it.

Sunday Indo Business

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