LURKING behind last week's results from Irish Fertilizer Industries (IFI) lies a potentially good tale for the one of the State's white elephants. Remember Nitrigen Eireann Teoranta (NET), with its massive debts? And the side stepping of the real problems by leaving the debt with NET, and the hiving off of NET's business into IFI, a joint venture between NET and ICI?
NET, which effectively manages the debt and sells IFI the gas it receives at a subsidised rate from Bord Gais Eireann (BGE), saw its debts rise to a peak of £187 million in 1995 but this is understood to have been reduced to £155 million now. And if the fertiliser industry remains stable, this could be reduced to between £100 million and £110 million by 1999.
That is a crucial year, not only for NET but for IFI as well. Just before the millennium, on December 31st, 1999, that four way agreement between IFI, ICI, NET and BGE will be terminated. Hatched in 1987, the agreement was designed to avoid, the loss of 500 plus jobs, and to avoid the Government having to write off £180 million of debt.
Even with these manoeuvres, it was not all plain sailing. At one stage, in 1992, with the fertiliser industry going through a bad patch, it was feared that the debt could reach £200 million by 1995.
The termination of the agreement has less serious implications for IFI than for NET. Contrary to some views, IFI appears to be paying a commercial rate for the gas. Industry sources say it could be plus/minus 5 per cent.
The price of energy is very important to IFI, which has manufacturing operations in Cork, Arklow and Belfast. One of the largest component of the cost of sales is energy, accounting for around 25 per cent. This includes electricity but the vast bulk is made up of gas. Indeed, IFI could well spend around £30 million.on gas Her annum. .
In less than three years time, unless there is a new agreement with NET (and that depends on NET having an agreement with BGE), IFI will be able to buy gas on the international market. Using BGE's pipes, it would have to pay a transmission fee and that is unlikely to be inflated, as regulators are bound to be in place by then.
And what about the ICI connection? The ICI connection was important in 1987 but it is pretty irrelevant now and should be scrapped. ICI came in as a 49 per cent partner with NET (it has 51 per cent) at a time of great uncertainty and it threw in Richardsons, the Belfast compound fertiliser company, for its stake. It also has a £1 million management agreement with IFI.
But ICI was then one of the big four in fertilisers. It has since considerably reduced its interests in fertilisers, while IFI has built up its own expertise, so the expensive ICI link is no longer necessary.
Two years ago, when the fertiliser industry was going through a troublesome period, ICI wanted to see sell its stake. Now it appears content to remain as a shareholder and take the dividends, which last year amounted to £3.8 million.
IFI is interested in going public but how feasible is that? There is no doubt that IFI, which it is worth noting, is Ireland's largest producer of bulk chemicals and the only manufacturer of agricultural fertilisers, has made great strides. In a nine months period in 1989, it had borrowings of £16.4 million. This was down to a mere £0.2 million last year and that was after u13 million was spent on new capital expenditure.
Pre tax profit increased from £18.4 million to £18.7 million but, if restructuring costs of £1.7 million are excluded, the underlying trend is better. This growth was achieved solely because £2.1 million was shaved from administration costs.
While the balance sheet is in good condition for a flotation, and it is generally regarded as an efficient operator, it is not equipped to compete with the large international plants. IFI, which generates 90 per cent of its sales from fertilisers, acknowledges the need to have another niche to give it a better, and safer, spread of interests.
However, the marginal decline in sales from £165.6 million to £161.5 million is not a particularly good augury. More importantly, investors would want to know more about IFI after 1999, so any flotation move would be unlikely before then.
After 1999 will be even more crucial to NET because the agreement to buy gas at a substantial discount from BGE will terminate then. If the fertiliser market remains stable, the debt could be reduced to a little over £100 million.
By that time, IFI could be paying it dividends of £4.5 million. That would not be sufficient to service the debt at the present cost of funds of 7.4 per cent. However, if convergence means anything, then Irish interest rates should fall. In that scenario, dividend income could come close the servicing the borrowings.
That, however, would still leave the capital to be repaid. Industry source say IFI's plants and business could be worth about £100 million (this would be higher if the value were based on a multiple of profits). On that basis, a sale of its 51 per cent stake in IFI, would still leave a debt of £50 million outstanding. That would be a considerably brighter scenario that what was thought possible. Still, at that stage, the Government would have, to ponder on what to do with that residual debt.
