Smurfit chief ponders return to the market

Gary McGann, chief executive of Jefferson Smurfit Group, is feeling curiously energetic. Aged 54, he has seen a career progression that few could even imagine when they set out as ambitious 20-somethings.

Yet, after flitting from sector to sector and melding the worlds of public and private business for some 30 years, he claims to have no desire to quit while he is ahead. In fact, he has just taken on one of the biggest challenges of his life.

Early retirement is for wimps is the unspoken feeling here, with Mr McGann expecting to remain at the top of his game for some time yet. And, as the head of a company that posts €5 billion in annual sales, spans two continents and more than 20 countries, and employs some 30,000 people, he is among the lonely few in Irish business who have reached about as high as they can go.

It is perhaps surprising then that he has taken on, as a secondary duty, one of the most politically difficult jobs in the Republic. As the new non-executive chairman of the Dublin Airport Authority, he will oversee what most expect to be a difficult transition to a leaner, meaner aviation facility.

Jobs are expected to be lost, even though Mr McGann is too canny to publicly acknowledge this until the authority finds a new chief executive and draws up a business plan. Whether he admits it or not, it is unlikely to be pretty. Certainly, it will be challenging. Rewarding? Well, maybe if he's very lucky.

Mr McGann, whose life is already so filled to the rafters with the paper and packaging activities of Smurfit that his time at home is rationed, silently acknowledges that he wasn't exactly chomping at the bit to take on the job. He says it was a simple matter of being asked, and then being asked again until the only answer could be yes.

And so it goes - another day, another challenge for Gary McGann.

He says he has been "blessed" throughout his career, both by variety and the opportunities he has had to learn from inspirational leaders. (For the record, Dr Michael Smurfit is an "incredible leader" who can "bring people with him".)

After college, Mr McGann's working life began in the public sector within the Comptroller and Auditor General's office, although he soon moved on to join Ericsson, which was, at that time, starting up in Athlone, Co Westmeath.

Next stop was drinks distributor Gilbeys, where he ended up as chief executive.

His big move into the public eye (and the semi-state sector) came in 1994, when Bernie Cahill brought him on board as chief executive of Aer Lingus, which, at the time, was being pulled back from the brink by the Cahill Plan. Again, however, the headhunters soon came knocking and, before long, he was on the move again.

This time the private sector lured him in again, with the offer coming from none other than the legendary Dr Smurfit.

The initial proposal was for Mr McGann to become finance director, a role he took up in 1998. Two years later, he was elevated to become president and chief operating officer.

The final hike up to the chief executive's chair came in 2002, when Jefferson Smurfit was being taken private in a leveraged buyout by US private equity group Madison Dearborn.

Mr McGann says that the €3.7 billion take-private was simply the result of Smurfit's stock not attracting the valuation the board believed it merited.

He derides the popular perception that the 1970s and 1980s were the "golden days" of Smurfit, pointing instead to 1998, when the firm acquired one-third of Smurfit Stone, as its heyday.

The important thing about the Smurfit Stone deal, according to Mr McGann, was that it left the firm in control of its own output.

"Despite this, we couldn't unlock the embedded value and get it recognised," he says, explaining why the firm's board began to look at "all the options" for the company.

Mergers, sales and reverse takeovers were among the routes considered at that time, but "none worked".

The one option that had not yet blipped on the radar was a take-private, although the approach of US private equity firm Madison Dearborn in 2002 soon changed that.

Madison is now the largest paper sector investor in the world, having completed $11 billion (€8.5 billion) worth of deals over two decades.

Mr McGann describes Madison Dearborn as a "long-term player" although, in the next breath, he acknowledges that the classic gap between taking a company private and bringing it back to the market is about five years,

He says that the firm is "very focused on opportunities".

The chemistry with Madison Dearborn was right from the start and remains exceptional, he says.

"The greatest compliment we can pay them is that everything they said they'd do, they have done," says Mr McGann.

The leveraged buyout, which saw the 29.4 per cent stake in Smurfit Stone being spun off, took almost a year to conclude, from the moment Dr Smurfit got his first call from Madison to the deal being approved by shareholders and regulators.

Mr McGann has no doubt, two years after the deal was concluded, that it was the right thing to do for management, shareholders and the business.

"If we did it, it was the right thing to do," he says. "Otherwise, where would the share price have been today? If we couldn't unlock the value then, where would the share price be today?"

The market has admittedly not been kind to firms such as Smurfit since 2000.

Smurfit, meanwhile, has - at least according to Mr McGann - been fulfilling all the objectives of the take-private. Put simply, these were to simplify the firm's regional structure by exiting minority holdings, improve its operating efficiency and pay down debt.

"We're not in a position right now to really do anything until we pay down serious debt," he says, stealing the Fianna Fáil "a lot done, a lot more to do" slogan. So far, debt has fallen from the €3.4 billion that was in place after the take-private was done and dusted to less than €3 billion.

So how long must the market wait for Madison Dearborn's "long-term" investment to approach its maturity date?

"I don't know," is Mr McGann's best answer. He points to instances where the private equity player brought investments back to the market relatively quickly and others where they were more patient.

When pressed he says he wouldn't be surprised to see it in a year or a year and a half, adding that there are "no absolutes".

"Clearly, it's a very real option," he says later, noting that the focus is not the exit but how the value can be maximised.

This issue of timing was highlighted by some in February, when Smurfit went on the rounds to sell a €250 million bond.

The structure, which was by no means unusual, generated unwanted attention when some commentators chose to view it as a way for Madison to cash in its investment before maturity.

The reality of the situation, according to Mr McGann, is that Smurfit's bankers approached the firm with what they saw as an opportunity to raise debt in a cost-effective manner. The terms would have been "very attractive" for the company if they had been achievable, says Mr McGann, explaining that they would have allowed Smurfit to "retire" some of its equity.

In the end, however, the pricing was not right and, on the basis of "mathematics", the bond was pulled.

Mr McGann rejects outright suggestions that this focus on borrowings must have left the firm open to the type of under-investment criticism that was levied at Eircom when it was taken off the market. The theory is that all free cash goes into servicing and eliminating debt, leaving little left over for the capital investment that would generate future growth.

He says the analogy simply does not apply to Smurfit, which operates in an industry that had long been "over-invested". Rather than building assets, Smurfit's plan was always to acquire existing properties and sweat the maximum from them.

"We are investing and investing carefully," he says, pointing tothe €185 million the firm spent last year on the European assets of Smurfit Stone.

With the day-to-day Smurfit business, Mr McGann is adopting a steady-as-she-goes approach. The fortunes of Smurfit, which concentrates on making container board, corrugated containers and other paper packaging products, are linked more closely with the health of the economy than many businesses .

In this light, third-quarter results to be issued later today are likely to show pedestrian rather than stellar growth.

One Smurfit asset that attracts more attention than most is the K Club in Co Kildare.

Mr McGann believes the sumptuous facility is about the "genesis of high-class golf in this country", but acknowledges that it is slated for sale in the wake of the Ryder Cup being held there next year. If the recent £130 million (€187 million) sale of the Wentworth Club in England is anything to go by, it could attract significant interest.

However, even a hefty price-tag such as this would fail to dispel the perception that the K Club was never anything but a vanity investment for Dr Smurfit, who is a keen golfer.

Mr McGann disputes this with fervour. In fact, he says, the K Club is the result of pressure placed on Jefferson Smurfit to give something back to the Republic in return for more practical tax treatment of foreign earnings and outgoing foreign dividends.

At the time, leisure was a growth business and, out of hard business logic rather than a "whim", the K Club was born. So rather than the luxury resort and golf course being a Michael Smurfit statement, it was more of a legacy to the Irish economy and people. Good to clear that up.

As for Mr McGann's own golfing habit, time is becoming a bit of a problem with his new airport role. He says aviation is a "fascinating" world, although one wonders how fascinating it will be if the new authority's business plan leads to the strikes that some expect.

Mr McGann says the role of the board is to have a very clear understanding of what the Government wants and then work to bring that about.

In doing this, he will be applying the same business principles to the airport as he has applied in the top job at Smurfit - a prospect that may or may not bring comfort to the airport's workers.

Factfile

Name: Gary McGann.

Age: 54.

Position: Chief executive, Jefferson Smurfit Group.

Family: Married to Moira with three daughters, aged 24, 27 and 30.

Hobbies: Golf.

Background: Dublin-born, he studied arts at UCD, then became a certified accountant and took a Master's degree at the Irish Management Institute. He began his career in the Comptroller & Auditor General's office, moved on to Ericsson, Gilbeys, Aer Lingus and finally Jefferson Smurfit.

Why he is in the news: He was recently appointed chairman of the Dublin Airport Authority.