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Time to call the bottom-fishers' bluff at Irish Life & Permanent

LAST week's High Court decision granting the Minister for Finance an order directing Irish Life & Permanent to sell its profitable life and pensions business is likely to sound the death knell for the bancassurance group in its current form, with existing shareholders seeing their investment virtually wiped out.

We are now into the IL&P endgame. With the group needing to raise up to €4bn of fresh capital to plug the holes in its balance sheet caused by bad debts and loss-making tracker mortgages, this week's High Court order directs IL&P to offer Irish Life for sale, either through a stock market flotation or a trade sale, no later than October of this year.

IL&P management consented to the order even though any sale of IL&P would strip the group of its only profitable arm. The only ones opposing the Irish Life sale are a noisy group of IL&P shareholders, primarily Malta-based Scotchstone Capital. It has been seeking to force IL&P to call an emergency general meeting of shareholders to block the sale.

Although Scotchstone claims to represent 12 per cent of IL&P's shares -- more than twice the 5 per cent level needed to call an EGM -- the company has so far resisted its call for an EGM, arguing Scotchstone's IL&P shares are held through a nominee account and not in its own name.

The Scotchstone argument seems to be that because an Irish Life sale would raise an estimated €1.5bn-€1.6bn -- about 40 per cent of the €4bn of fresh capital required by IL&P -- then the existing IL&P shareholders should end up with 40 per cent of the rump IL&P after the sale of Irish Life.

Nice try lads, but it won't work. As the Americans say, do the math. At the current share price of just 6.3 cent the whole of IL&P is valued at a mere €17.4m. That leaves IL&P trailing such titans as Aminex, Donegal Creameries and Ormonde Mining in the Stock Exchange pecking order.

And it's not difficult to see why. While Irish Life, which had an embedded value (basically the value of its in-force business) of €1.7bn at the end of last year, has been variously estimated to be worth €1.5bn-€1.6bn, IL&P's other arm, mortgage bank Permanent TSB, is a complete basket case. It lost €365m last year and has €18bn of loss-making tracker mortgages on its books.

Last March's stress tests on the Irish banks calculated that Permanent TSB needed to raise up to €4bn of fresh capital. Given the dreadful state of its loan book -- not alone is it chock-full of trackers, it relies on the wholesale markets to fund 65 per cent of that loan book, by far the highest proportion of any Irish-owned bank -- the notion that any private-sector investor would put a penny of fresh capital into IL&P strikes me as being extremely far-fetched.

That leaves the much put-upon Irish taxpayer to pick up the tab. If the Government hadn't pledged to make up any capital shortfall remaining after the sale of Irish Life then IL&P would have collapsed long ago, an unpleasant fact that Scotchstone seems determined to ignore.

Perhaps the Government should call the bottom-fishers' bluff. If Scotchstone is so exercised about protecting the rights of existing shareholders then the Government should offer to leave the existing shareholders, including Scotchstone, not with 40 per cent but 100 per cent of IL&P -- providing they, not the Irish taxpayer, are prepared to put up the full cost of fixing the broken bancassurer.

Sunday Indo Business