Business

Monday 22 January 2018

Richard Curran: Finance Department lessons in the school of hard Brexits

Carl McCann, chairman of Total Produce Picture: MacInnes Photography
Carl McCann, chairman of Total Produce Picture: MacInnes Photography
Richard Curran

Richard Curran

I wonder if the Brexit unit of the Department of Finance held its own Christmas party last month. Bearing in mind that we were told by the secretary general of the department last Thursday there are only four of them working full-time on Brexit in there, it would have been a cosy event. And with lots to talk about.

If the secretary general popped in for a few minutes, there would have been five of them.

The Department of Finance chief economist didn't hold back on the implications that a hard Brexit could have on the Irish economy. The hit to growth could be around 4pc after 10 years. He talked about 40,000 job losses and an increase in €20bn to the national debt.

These estimates are all based on a model that doesn't allow for government intervention. Bear in mind that we may also gain quite a few jobs through higher inward investment, particularly in financial services.

But the most worrying things are where the 40,000 jobs would be lost and just how a hard Brexit might add €20bn to the national debt.

A preliminary study by the ESRI pointed strongly to indigenous exporters, particularly in the likes of the food sector, which would be vulnerable. Border counties are also especially vulnerable.

So we could see a loss of jobs in firms and locations where they are most needed and if anything more embedded in the local economies. For example, World Trade Organisation Tariff rates, if introduced in Irish/UK trade, would see additional charges of 45pc put on beef exports to the UK. This would result in large beef processors increasing investment in their British operations to supply the UK market because it wouldn't be profitable to export from Ireland.

Equally, it could prove devastating for beef farmers in Ireland who supply those processors and have relied heavily on the British market.

A couple of thousand extra jobs in the IFSC in Dublin won't replace that lost income and employment in other parts of the country.

But there is another interesting element to the department's estimates. Lower growth would mean lost tax revenue. Assuming in its calculations that the Government took no action, presumably the extra €20bn of exchequer borrowing over 10 years would come from overspending by the Government. A shortfall in tax revenues, such as income tax, a higher social welfare bill from job losses and reduced Corporation Tax take would all translate into higher borrowing unless government spending commitments were curtailed.

That should be food for thought for all of the coalition partners in Leinster House, those on the Opposition benches and the public sector unions.

Only one banana skin in McCann exit from Fyffes

Fyffes shareholders approved the €750m takeover of the banana importer during the week, which will mark the end of the McCann family connection with the firm. It began in 1902 when Neil McCann's father, Charles, became an agent for Fyffes and sold their produce in his Dundalk shop.

After floating Fruit Importers of Ireland on the Dublin stock market in 1981, Neil McCann bought out the UK-based Fyffes just five years later. Fyffes is apparently the oldest banana company in the world.

The McCann family have done incredibly well out of the venture and will do well on their way out the door, too. Japanese acquirer Sumitomo is paying a significant premium to the trading share price and that is why over 90pc voted to back the takeover. Shareholders will end up getting €2.25 per share when dividends are included.

The McCann family will share out €87m through the family's Balkan Investment Company. This company is owned by nominee companies and ultimately goes back to a family trust, so it isn't clear exactly who in the family is getting what.

But Balkan still has 37m shares in Total Produce, chaired by Carl McCann, valued at €68m. It seems Sumitomo will also end up with the 40pc shareholding in Balmoral International Holdings held by Fyffes. Balmoral is the remnant of the property venture (previously called Blackrock International) which was spun out of Fyffes back in 2006, just in time for the property crash.

Its spectacular fall from grace saw write-downs of several hundred million euro as the crash unfolded. The latest accounts for Balmoral show it had rental income of €11.2m in 2015. Its interest bill was €11.5m.

But the accounts benefited from a €7m property re-valuation, without which it would have reported a €3m loss. It valued its property portfolio at €165m and had total assets of €196m. Borrowings amounted to €175m.

It put a net asset value on its shares at 3.3c each, which values the Fyffes stake in Balmoral at around €6.9m and Balkan's remaining shareholding at €1.1m.

Well, you can't win them all.

Coulson inches closer to tough IPO at Ardagh

Glass and metal container giant Ardagh Group is taking another step on the long road to its IPO. The company plans to re-finance almost $1.3bn of debt that is due in two years' time. It has already re-financed around €3bn of its massive €8bn debt pile in recent years.

The logic is compelling. Ardagh can continue to re-finance debt at cheaper levels than it is currently paying and in the process also push out the dates of when debt falls due.

It said last Thursday that it was launching the sale of $1bn of senior bonds that will mature in 2025.

The proceeds of this sale, along with a further $300m of Ardagh's cash balances will be used to repay an existing $1.26bn of debt that is due in 2019.

Ardagh plans to have only $265m of debt due before 2021. This will buy the company breathing space to fully integrate its new businesses and further pay down debt.

Less obvious is the logic of doing the IPO at all, given that the company only plans to sell off around 5pc of its equity. If it can continue to raise significant sums in the bond market, why does it need the IPO?

Normally IPOs are used as an opportunity for owners to land a big payday. But shareholders in Ardagh have already bagged a lot of money in dividends on the back of higher borrowing. In 2011, €183m in dividends was paid, of which company chairman Paul Coulson would have received around €60m. Then in June 2014, a further €63m was paid out.

Coulson explained it to investors back in October when he said it has been a "long-held objective of Ardagh" to raise equity in an IPO. "It will give us access to public equity markets for further acquisitions and provide us with one way of repaying our HoldCo debt." He also said it would provide public market liquidity for the company's shareholders.

That all seems logical except it is unlikely to raise more money to do more acquisitions in the short term. The bond market might not like it if current shareholders wanted to sell a lot of shares post IPO.

For Coulson, it will at least be a case of: "I said I would do it and now I have." With all of the uncertainty in the markets around the early days of the Trump presidency, it might not be that easy to get away at a valuation management would like.

But then again by selling such a small stake it might be a lot more palatable if the float price was on the low side.

Sunday Indo Business

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