Monday 20 November 2017

Newsmaker: Wilbur Ross, investor

The EBS is set to become the first of many firms to be snapped up by overseas investors

Wilbur Ross wants to buy the EBS. The flamboyant American investor reckons that he can transform the fortunes of the state-controlled building society. As the economic downturn deepens more and more cash-strapped businesses are likely to be bought by overseas 'vulture' investors.

Corporate Ireland is up for grabs. It isn't just our banks. The entire property sector has been reduced to a basket case, with values having fallen by up to 90pc. The collapse in consumer spending has decimated the retail sector. The country is awash with new hotels. All this while personal borrowing by controlling shareholders has wreaked havoc with the balance sheets of hundreds of otherwise-healthy private companies.

Meanwhile, the parlous state of the public finances means that the Government will have to override trade union objections and flog off the State's remaining assets including: the ESB; Bord Gais; Dublin Airport Authority; the new motorway network; the ports and just about anything else that isn't nailed down.

This has set the stage for the largest transfer of property and other assets recorded in Ireland since the landlords were bought out in the late 19th and early 20th centuries.

When the dust eventually settles on the 'Celtic Bust' later this decade the ownership of corporate Ireland will have been transformed beyond recognition.

New owners

Many, if not most, of these new owners will come from overseas. With the Government committed to pumping at least €25bn, and probably much more, into Anglo it will be difficult, if not impossible, for it to resist even a superficially attractive offer for either AIB or Bank of Ireland.

Despite their currently distressed state, there have already been tentative expressions of interest in both of the major banks. Bank of Ireland was forced to deny rumours of a takeover from giant Spanish bank Santander in September 2008, while Canadian Imperial Bank of Commerce is understood to have approached AIB about the possibility of it taking a stake in the Irish bank in August 2009.

It isn't just our banking sector that looks set to pass into foreign ownership. What are the odds of Arnotts, where Ulster Bank and Anglo have recently converted some of the €300m which they are owed by the iconic Dublin retailer into a controlling shareholding, staying in Irish hands for very much longer?

Wilbur Ross, the American investor who specialises in buying financially-distressed companies out of bankruptcy, is the latest would-be overseas buyer to cast his eye over newly-cheap Irish assets. This week, in an interview with business TV channel CNBC, he revealed that he had teamed up with US hedge fund Carlyle and Dublin-based hedge fund Cardinal Capital to bid for the EBS.

Unlike some of the previous approaches Irish banks have received from overseas investors, this one seems to be the real deal with some sources indicating that an agreement to sell the EBS could be finalised as soon as next week.

If Ross and his partners do purchase the EBS they will have to recapitalise the former building society, with the Financial Regulator having stated that it needs to raise an extra €875m of capital by the end of the year.

As the cost of bailing out Anglo continues to escalate, off-loading the EBS would take some pressure off the exchequer, which was forced to inject €100m into the building society last June.

Mortgage writedowns

The EBS isn't the only bank that Ross hopes to invest in. He is also examining several US regional banks in the states of Florida, Michigan and New Jersey. If he gains control of the EBS he has promised to write-down the mortgages of homeowners stuck in the negative- equity trap.

"You have got to cut the principal amount. If you have a mortgage of 125pc (of the value of the property) the chances of it being repaid are slim. It's throwing good money after bad," he told CNBC.

While Ross was merely stating the patently obvious, his candour will have won him few friends among Irish bankers, for whom valuing their mortgage books realistically threatens to unleash a fresh torrent of loan losses.

A native of New Jersey, Ross graduated from Yale before going on to study for his MBA at Harvard. After graduating he joined the New York arm of investment bank Rothschild, where he developed a reputation as one of America's foremost bankruptcy advisers.

In 1997 he set up a private-equity fund to invest on Rothschild's behalf in bankrupt companies.

However, the terms of his deal with his employer precluded him from investing in companies being advised by Rothschild. As these represented one-in-three of all major bankruptcies in the US, his scope for investing was severely restricted.

By 2000 it was clear that it would be best if the two sides went their separate ways, and in 2000 Ross bought out Rothschild and renamed the fund WL Ross & Co.

Two years later, in the deal that sealed his reputation, Ross invested in bankrupt US steel producer LTV. He quickly merged this with another US steel company, Bethlehem, to form the International Steel Group. His total investment was a mere $325m (€249m).

Then in 2004 Ross sold the International Steel Group to Lakshmi Mittal's Arcelor Mittal for $4.5bn -- a near fourteen-fold increase in value in the space of just two years.

Despite being a life-long Democrat, Ross oversaw a tough restructuring programme during his two years in charge of International Steel.

Work practices were drastically modified with the previous 32 job grades being reduced to just five, while the schemes under which LTV and Bethlehem had previously funded their retired employees' healthcare expenses were scrapped -- and replaced by a much less generous arrangement.

In 2004 Ross bought the coal-mining assets of Horizon Natural Resources out of bankruptcy to form International Coal Group. Since then the company has been dogged by labour disputes.

Anxious EBS staff, each of whom were paid an average of more than €70,000 last year, can expect a far more demanding and less generous regime under their new owners.

IT mightn't come as much consolation to the EBS staff, but Ross is as tight-fisted on the domestic front as he is in business matters. During the 1990s he was briefly married to Betsy McCaughey, who served as Lieutenant (deputy) Governor of New York between 1995 and 1998.

When McCaughey decided to run for governor in 1998, Ross advanced $2.25m to help get her election campaign off the ground. Unfortunately it very quickly became clear that McCaughey's chances of election were zero and Ross withdrew his money. Her campaign, and their marriage, folded soon after.

In addition to the International Steel, International Coal and regional US banks, Ross has also invested in textiles and automotive components. Workers in all of the companies in which he has invested have found him to be a tough taskmaster. Having told CNBC that he was "looking at other deals" in Ireland, it is likely that we will see a lot more of Wilbur Ross in the near future.

With assets that would never otherwise have come on the market now on the market at bargain-basement prices, the vulture has landed.

Irish Independent

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