ICG bid brings private equity debate home

Business Opinion:It is an exaggeration, but perhaps not too much of an exaggeration, to postulate that the way things are going, soon the only thing Irish about Irish Ferries will be the use of the national monicker in its name.

If you rewind a few years, the company was Irish-based, employed Irish crews, had Irish ships and paid Irish tax. Assuming the highly leveraged management buyout of its parent, Irish Continental Group (ICG) led by chief executive Éamonn Rothwell goes ahead, the company will for all intents and purposes belong to a syndicate of banks put together by AIB to finance the deal. And if they have any sense, they will have syndicated this debt internationally. Again, its something of an exaggeration, but not entirely one, to say that the company will in effect be foreign-owned.

It still employs 500 people, but it has relied more and more on outsourced, cheaper foreign labour and amidst some controversy made the crew on its Irish Sea service redundant last year and replaced them with cheaper eastern European crews. Its ships are also now registered in foreign jurisdictions.

As for tax, unless the ICG management and its backers have got their maths wrong, the company should be able to substantially reduce if not eliminate its tax bill tax for some time to come.

One of the more controversial and less publicised aspects of highly leveraged private equity style deals is the way in which the buyers can use the interest on the debt raised to finance the deal to reduce their tax bill.

And then there is the whole issue of ICG's property portfolio, which includes a 150-year lease on 33 acres of State-owned land in the Dublin docks.

ICG have gone to some lengths to counter the suggestion that in many ways the shipping business is just a side show and the real target of the take private is the land bank.

They point out that the terms of the lease - and its location deep in Dublin Port - make any sort of development impossible and that it is really worth something in the region of €3 million.

But the property play theory still persists, mostly because of the deal done by South Wharf on its site in Dublin's docklands.

Like ICG, they were faced with a restrictive covenant and a not very enthusiastic landlord in the form of Dublin Port, but eventually a compromise was reached which sees both of them benefiting from the sale of the 24.9 acre site to a consortium led by Bernard McNamara for €424.35 million.

If you buy into all of this, then taking ICG private represents the penultimate step in its transition from a full-blooded Irish business and the proud figurehead of our maritime tradition, to a foreign-owned, medium-term play on the Dublin property market financed by a tax-efficient mechanism that involves a few ships.

Such a view may verge on the histrionic, but it puts the current debate about private equity into some sort of Irish context.

Globally - and in the UK in particular - there is something of a backlash against the trend for taking publicly owned companies private. To date, it has gone pretty much unremarked on this side of the Irish Sea, although the national obsession with Eircom's "failure" to open up its network and facilitate broadband penetration is in effect a critique of the private equity process.

The plan to take ICG private will see a second business involved in an activity of some strategic importance saddling itself with a mountain of debt.

While the new owners will reap their reward, either through a refinancing or a further sale, the company must finance the debt. In the case of Eircom, this meant squeezing every last drop out of its dominant position in market and cutting back on investment.

Whether something similar is on the cards at ICG is debatable. While it may be the best-known player in the passenger ferry business, it has no shortage of rivals in the freight business, which is the most significant aspect of its business, both from the ICG perspective and dare one say it, the national strategic interest.

And indeed, the argument can be made that the various steps taken by ICG to cut costs have all been in the wider interest as they have kept down the price of getting goods in and out of the country.

And If you see this as the only yardstick by which a ferry company plying its trade in Irish waters should be judged, then it's a case of good luck to Mr Rothwell and his colleagues.

However, the arrival late on Friday of Philip Lynch's One 51 Capital on the ICG share register with a 5.64 per cent stake indicates that management may well have to pay over €18.50 a share to take control.