Saturday 15 December 2018

Schism at Arnotts


Less than four years after he successfully beat off a hostile takeover attempt for the company, Arnotts chairman Richard Nesbitt faces the prospect of having to do it again.

With the dominant Nesbitt and O'Connor families having fallen out, a battle royal for control of Dublin's largest department store has ensued.

Richard Nesbitt is the fourth generation of his family to be involved with Arnotts. It started in 1867 when his great-grandfather Alexander Nesbitt first joined the company at the age of 16.

By 1909 he had risen to become chairman. The Nesbitts have been in the driving seat at Arnotts ever since. A striking feature of Arnotts since it was first founded in 1843 has been its ability to re-invent itself as business conditions change.

When its original Henry St store was destroyed by fire on May 4, 1894, mentioned in James Joyce's novel Ulysses, the company was back in business with a temporary store in the round room of the Rotunda within five days.

Then when in 1932 the new Fianna Fail government imposed a 60pc tariff on imported clothing and textiles, Arnotts suddenly found that purchasing clothing from its existing UK suppliers no longer made any economic sense.

The problem was there weren't enough suitable Irish suppliers. So Arnotts went into the clothing manufacturing and wholesale businesses itself.

In the 1980s conditions changed once more. The free trade which followed EU membership meant that the manufacture of clothing was no longer viable here. Arnotts shut down its manufacturing and wholesaling operations and concentrated exclusively on retail.

Then in the 1990s when old-style department stores such as Arnotts looked like they were going to be wiped out by the chain store groups the company morphed again.

It spent over €50m upgrading its Henry St store which had become very dowdy. The result is today's spanking 300,000 sq ft store, which forms the heart of Henry St/Mary St, Dublin's busiest shopping thoroughfare.

So it should have come as no surprise when in 2002 Peter O'Grady Walshe first attempted to take over Arnotts that the company would respond in kind.

The weakness of his position was that with the Arnotts staff pension fund then owning 13pc of the company and the Nesbitt and O'Connor families owning a further 13pc between them, he needed the agreement of the board for his bid to succeed.

Richard Nesbitt, who was then a non-executive director of Arnotts, was having none of it. There was no way he was going to surrender control of the family company to some Johnny-come-lately after almost 100 years.

Instead he grabbed the reins and persuaded the Nesbitt and O'Connor families to launch their own takeover. Their €257m bid blew O'Grady Walshe out of the water and brought his career as a would-be corporate raider to an abrupt end.

While there were many who thought at the time that Richard Nesbitt had overpaid to take Arnotts private, his timing turned out to be perfect.

Having spent the guts of €100m buying several neighbouring properties, Arnotts now owns most of the prime city centre block bounded by O'Connell St, Henry St, Liffey St and Middle Abbey St. The company is now worth a multiple of what he paid for it four years ago.

Following the successful takeover, Richard Nesbitt became chairman of Arnotts. He personally owns about 5pc of the shares in the company, while Art Ltd, a company of which Nesbitt owns 60pc, owns a further 60pc of Arnotts.

Various other members of the Nesbitt family own about 10pc while the O'Connors have a combined 24.5pc stake.

Between the jigs and the reels this means that while Richard Nesbitt has a 41pc economic interest in Arnotts, he has 65pc of the votes. This means his position at Arnotts is pretty much bomb-proof. Unless he agrees to a takeover, it won't happen.

This hasn't stopped the O'Connors trying. Last week they launched a takeover bid for the company. They bid €50 a share which would have valued the Arnotts at about €510m, including debt, which the O'Connors calculated to be €310m.

Again Nesbitt was having none of it. Not only did the Arnotts board reject the bid, Nesbitt personally offered to buy out the O'Connors for €25 a share, which would have valued the Arnotts equity at €100m.

As both Nesbitt and the O'Connors know only too well, neither figure comes within an ass's roar of accurately valuing Arnotts.

Not alone does the company now own most of what is probably one of the most valuable city blocks in Dublin, it also owns the Boyer's department store on North Earl St and the River Island store on Grafton St while, just for good measure, there is a €200m surplus in the staff pension fund.

Assuming the company could get its hands on even half of the pension fund surplus, then it is difficult to see how Arnotts' gross value could be much under €1bn. Of course the company's debts would have to be deducted from this figure.

There is some dispute over the extent of Arnotts' debts with Nesbitt arguing that the company owes between €80m and €90m more than the €310m claimed by the O'Connors.

However, even if one accepts the higher debt figure, it is still hard to see how Arnotts' equity could be worth much less than €500m.

Last September the company announced an ambitious €700m plan to redevelop the property it owns between its Henry St store and Middle Abbey St.

Arnotts aims to create an entirely new shopping and leisure area, the Northern Quarter, which will include 47 shops, a 152-bedroom hotel, 17 cafes and 189 apartments.

So why are both sides playing silly buggers making what they well know are ridiculously low offers for the other's shares? Almost certainly last week's developments were merely the opening shots in what promises to be a long war of attrition.

For the O'Connors to have any chance of success they will have to detach most of the other members of the extended Nesbitt family shareholders from Richard Nesbitt. That's almost certainly a long shot.

Even if they fail to undermine the unity of the Nesbitt family, the O'Connors aren't entirely powerless. To successfully develop the Northern Quarter, Arnotts will need to attract an outside partner, most likely a property developer, and borrow several hundred million euro.

The last thing a potential partner or lender will want to get involved with is a company whose main shareholders are at each others' throats.

This means that when the shouting has died down Richard Nesbitt will probably move to buy out the O'Connors, either by paying them cash for their shares, or else giving them the Grafton St or North Earl St properties.

Richard Nesbitt's success in growing a long-established family business is all the more remarkable when one considers that he has never been more than a part-time director or chairman of Arnotts.

His day job for more than 30 years has been at the bar. He first qualified as a barrister in 1975 and became a senior counsel in 1993.

He has specialised in commercial law and has represented the Department of Communications and property developer Mark Kavanagh before the Moriarty Tribunal and Irish Times journalist Paul Cullen before the Mahon Tribunal.

Now aged 55, Nesbitt looks much younger, his tall lean frame probably owes much to his love of physical exercise including swimming, cycling, skiing and tennis. He and his wife Madeleine have two adult children.

Now that relations with the O'Connors, who have been Arnotts shareholders for more than 60 years, seem to have irretrievably broken down.

It's likely that Richard Nesbitt will be spending a lot more time at the family company for the foreseeable future.

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