One or other of the protagonists will have to sell up and go as tensions on both sides have been growing for some time, writes Barry O'Halloran
It's not often that the most powerful shareholder in a company refuses to sell on the basis that the buyer is offering too much money.
But this is what Arnotts chairman and majority shareholder Richard Nesbitt did last week when the O'Connor family, which itself owns 24.7 per cent of the department store group, offered €200 million cash to buy out the firm.
The O'Connors - namely former Arnotts chairman Michael, and brothers Conor and Kevin - made the offer through their vehicle, Malpas.
Nesbitt, who owns more than 60 per cent of Arnotts, dismissed the offer. This is despite the fact that the bid is more than three times the price paid by the two families when they bought out the department store operator and delisted it from the Irish Stock Exchange in 2003.
His arguments were simple - the O'Connors were overvaluing the company by at least €70 million, and once the due diligence process revealed that fact, no bank would loan them the money they would need to support their offer.
Nesbitt subsequently dismissed the O'Connor offer as a "stunt" designed to force a generous counterbid for their stake in Arnotts.
The core of his position is that the offer underestimates Arnotts' debts. The O'Connors calculate these at €310 million and say this is the figure that was given to the board.
Nesbitt says that the company owes between €80 million and €90 million more than that.
He said publicly at the weekend that he would personally buy out the O'Connors for €25 million. He reiterated this in a letter to the O'Connors offering them €25 a unit for their stake, less than half the €50.57 which they are offering.
The O'Connors insist that their offer stands, that it is fully funded and is anything but a stunt. If it were, they've gone to an awful lot of trouble. Several observers this week argued that their offer should be taken seriously.
"They're well capable of running numbers and working out what the business should be worth, and they'd have a fair idea of where they want to go with it," one said.
Another suggested that they could recruit an ally in the shape of a large UK or multinational retailer that wanted to get a foothold in the Irish market.
A ready-made business on one of the Republic's busiest shopping streets - Arnott's main store is on Dublin's Henry Street - would look pretty attractive to someone like that. However, there's no evidence at this stage that the O'Connors have done this, or intend to.
At the same time, on the basis that the company is now in play, it's not beyond the bounds of possibility that they would sell at what they regard as the right price.
Whatever that price is, it's likely to be closer to €50 million than €25 million.
The one thing that seems clear is that one or the other of these long-term shareholders will have to sell up and go, as both sides are unhappy with each other, a situation that's good neither for them nor for the business they own.
Talking to the protagonists, it is pretty clear that tensions between the O'Connors and Nesbitts, and Richard Nesbitt in particular, have been growing for some time.
Nesbitt himself said last week that he had "invited" the O'Connors to use the exit mechanism provided by the company several times over the last four years. "But they declined to do so," he said.
This exit mechanism allows the O'Connors to notify the other stakeholders that they want to sell their shares, and name their sum. The asking price can be independently reviewed if necessary.
The O'Connors have been a little bit more circumspect about what's been happening behind the scenes, but sources indicate that they are not happy with the direction the company is going.
There have been a number of disagreements since the two families bought out Arnotts. But the main source of the tension is what Nesbitt calls Arnotts' "property aspirations".
That is the €750 million northern quarter plan to revitalise a large chunk of Dublin's city centre between Henry Street, the main shopping area on the city's northside, and Parnell Street.
The O'Connors believe that Arnotts should stick to what it does best, running department stores, and not put so much energy into property development, which is another business entirely.
But Nesbitt is keen on the idea, and has the backing of board member Niall McFadden, the property developer and financier who recently floated Boundary Capital on the Dublin and London markets.
McFadden helped to structure the deal that allowed the two families to buy out Arnotts four years ago and wields a fair bit of influence as one of Nesbitt's main supporters on the board.
Another strand to this is Arnotts' pension fund. Nesbitt tried to get it to take a share of the buyout vehicle which took over the company in 2003, but this was not possible.
The fund has a surplus in the region of €200 million, which would have pretty serious implications for the company's value if someone could come up with away of unlocking it. Recent reports claimed that the board has been looking at ways of doing this.
However, a spokesman yesterday said that while the issue had been discussed, the board did not approach the pension fund's trustees. "There has been no formal communication with the trustees, and we decided to leave the surplus there as a cushion for the fund," he said.
For the moment, the situation at Arnotts looks like a classic stalemate. The O'Connors want to buy, or at very least to end, the 70-year association the two families have had. But Nesbitt, who owns most of the shares and controls most of the voting power in the company, says he is not going to sell, to the O'Connors or anyone else.
However, a situation that basically boils down to a row between shareholders cannot last very long without damaging the company.
Either way, observers believe that one side or the other will have to pack its bags and leave Arnotts.
As one said at the weekend: "Whatever happens, the ownership of Arnotts is going to change as a result of all this."
