Sunday 9 December 2018

Sell, sell, sell? Stockbrokers hunt partners as Goodbody closes in on €100m deal

All of Ireland's major stockbrokers are looking to either sell or buy but are they calling the top of the market amid fears bull run is over

Records dating from the 1800s listing the daily trades are seen on blackboards at the Irish Stock Exchange — stockbroker Goodbody could be sold in a deal which would be good for shareholders but bad for the taxpayer
Records dating from the 1800s listing the daily trades are seen on blackboards at the Irish Stock Exchange — stockbroker Goodbody could be sold in a deal which would be good for shareholders but bad for the taxpayer

Dan White

Spring is the air. Ireland's stockbrokers are strutting their stuff as they seek out a partner. Most of the country's brokers are either up for sale or looking for an acquisition.

Goodbody, Ireland's oldest stockbroker, was sold by previous owner AIB to Brian McCarthy's Fexco in 2011 for just €24m as the stricken lender desperately off-loaded non-core assets as part of the terms of its €20bn government bailout.

Seven years later Goodbody is back on the block. What a difference seven years makes. Sources close to Goodbody say that the brokerage could be sold to a Chinese investor in a €100m deal. Property developer Richard Barrett, who now does most of his business with Chinese clients, was the matchmaker who brought the two sides together.

The Goodbody shareholders - the Fexco shareholding is now 51pc with the company's management owning the remaining 49pc - will also receive up to €42m from the sale of Goodbody's 27pc stake in the Irish Stock Exchange.

The €21m Fexco will receive from the Irish Stock Exchange takeover will almost completely cover the cost of its initial investment in Goodbody, with anything it receives from a sale of the company being pure profit. Fexco has also reaped very significant dividends from Goodbody since 2011.

Despite being majority-owned by Fexco, Goodbody has always operated largely independently of its Killorglin-based parent company. "A sort of independent republic", was how one observer described the situation.

Last November's €137m takeover of the Irish Stock Exchange by Euronext has had a domino effect. By unlocking the previously unrealised value lying on the balance sheets of its member-shareholders it has cleared the way for a number of deals that were already being discussed - the proposed Goodbody's deal has been under discussion for up to two years.

As cyclical business go, stockbroking is right up there. It was hit hard by the crash and the implosion of the Irish-owned banks. By 2013 the annual value of shares traded on the Irish Stock Exchange had fallen to €57bn.

With the value of Irish shares having more than doubled in the five years to the end of 2017, trading volumes have also risen dramatically. In 2017 shares with a value of €98bn were traded on the Irish Stock Exchange, a 72pc increase on the 2013 figure. This recovery has continued into 2018 with January equity turnover of €9.2bn, up 46pc on January 2017.

While most Irish stockbrokers now generate up to half of their revenues from fees rather than trading commission, this increase in volumes has still greatly boosted their profits.

The current deal fever has been unleashed by a combination of factors including increased regulatory costs, Brexit and the Stock Exchange sale as well as the strong recovery in share prices and trading volumes.

Goodbody is not alone in being on the block. AIB, which was forced to sell Goodbody in 2011, is reputed be running the slide rule over Investec. Cantor Fitzgerald is supposed to be eyeing up rival brokerage Merrion, while Davy is considering acquiring wealth manager Saunderson House from IFG.

Only Bank of Ireland seems to be standing aloof from the financial mating game (see panel).

Old saws who have seen it all before point out that stockbrokers putting themselves up for sale is rarely a good sign. Is this a case of the brokers calling the top of the market?

The events of the past week on global financial markets should certainly serve as a warning. While share prices recovered later in the week, the 7pc fall in the Dow underlines that the current bull market is getting very long in the tooth. In Dublin the ISEQ index of Irish shares was down almost 5pc at one stage.

When, and it's always when rather than if, share prices fall so will share trading volumes and brokers' profits. If previous experience is any guide, any fall in share prices and trading volumes will make it much more difficult to sell brokerages.

"One parallel might be the tendency for M&A to happen on a cyclical basis, with the top of the M&A cycle often coinciding with the top of the market," said Thomas Conlon, associate professor of banking and finance at the UCD Business School.

"Once liquidity disappears, investors and especially private equity, tend to sit on their money. In this sense, the current market volatility will make any sales more difficult",

So with stock markets wobbly and potential sale prices still high are the brokers getting out while they still can? If your stockbroker is selling should you follow their example?

Goodbody has certainly had a good run. As well as benefiting from the overall rise in the market in recent years it also bagged a number of lucrative advisory contracts, including acting for Aer Lingus in its takeover by IAG, for Applegreen in its IPO and for the Irish Government in last year's AIB IPO. The Government paid its corporate advisers and stockbrokers over €40m in fees of which Goodbody, as both corporate adviser and bookrunner, received a significant chunk.

Will Goodbody, which rivals estimate to be making annual profits of €10m-15m, be able to secure a similar stream of once-off corporate mandates in the years to come?

Sources close to Goodbody deny that the proposed sale is an opportunistic response to a possible market peak. Not alone has the proposed deal been under discussion for up to two years, Goodbody possesses competencies that the potential buyer wishes to acquire but currently lacks.

"This deal is not remotely in that space [selling out at the top of the market]", says the source. "They [the potential Chinese buyer] were looking for the right partner." The potential buyer is understood to be particularly interested in Goodbody's stockbroking and wealth management expertise. "These are not well developed in China."

While the proposed sale of Goodbody may have been thought out over a long period and meet the purchaser's strategic requirements, opinion is divided on the reputed €100m price tag.

"Hugely toppy", was how someone who has been involved in a number of similar deals, described the mooted €100m price tag while a stockbroking veteran reckoned that at six to eight times likely profits it was "good value". You pays your money and you takes your chances.

There has also been speculation that the revelation of a Chinese bid will "smoke out" other potential buyers and trigger an auction for Goodbody.

If this is going to happen, then for Goodbody's sake it needs to happen quickly. For a business whose main assets walk out the door every evening, an extended auction process would be hugely destabilising.

Goodbody managing director Roy Barrett confirmed last week that it and Fexco were in advanced discussions with a potential buyer and that the management team would be staying on if Goodbody is sold. He also reassured staff that there would be no job cuts or any change in strategy.

Barrett declined to comment through a spokesperson when contacted by the Sunday Independent.

Now that takeover talks have been confirmed it is difficult to see Goodbody not changing hands sooner rather than later. When it does, the Irish taxpayer, who effectively sold Goodbody for just €24m in 2011, is likely to be one of the big losers as Fexco and the other shareholders walk away with a multiple of that amount.

Dissecting the deal for Davy

The €100m Goodbody sale price being mooted would, along with the €42m it stands to receive from the Irish Stock Exchange sale, value the stockbroker at up to €142m. Unfortunately, we have no way of relating this price to Goodbody's profitability as the broker is controlled by a British Virgin Islands-registered company and doesn't file accounts with the Companies Registration Office.

Goodbody is the second-largest Irish stockbroker after Davy. While we have no way of knowing for sure the two brokerages' relative size, their shareholdings in the Irish Stock Exchange do provide a rough-and-ready indicator.

While Goodbody had a 26.7pc stake, Davy's shareholding was 38pc, almost one-and-a-half times as large. If we use this as our yardstick then Davy should be worth about €150m, plus the €60m it stands to receive from the sale of the Irish Stock Exchange, a total of €210m.

So far so good. Davy is significantly larger than Goodbody and is almost certainly worth considerably more. The value of Davy would also have risen in line with the recovery in Irish share prices and trading volumes since the crash.

However, even on the basis of the kind of figures being speculated upon for Goodbody, Davy is still worth considerably less than its managers paid Bank of Ireland for it in 2006.

In the autumn of that year, when it still seemed as if the Celtic Tiger would roar forever Davy's senior executives made Bank of Ireland, which then owned 90pc of Davy, an offer they couldn't refuse. The Davy bosses agreed to pay €315m for the 90pc they didn't own, valuing the company at €350m. Most of the purchase price was borrowing from Anglo Irish Bank.

A dozen years later it is clear that Bank of Ireland got by far the best of the deal. Even at the €210m suggested by the Goodbody deal speculation, Davy is still worth only 60pc of what its management team paid for it. Sometimes, rather than calling the top of the market, stockbrokers succumb to animal spirits also.

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