It is hard to imagine two more different billionaires. Sir Anthony O’Reilly is
married to a Greek shipping heiress, has homes in Dublin, London and New
York, a stud farm in Kildare, a château in Deauville, France, “built on the
ruins of the castle where William the Conqueror plotted his 1066 invasion of
England” and officially resides as a tax exile at a gated community at
Lyford Cay, near Nassau, in the Bahamas.
A knight of the realm, he frequently dines with heads of state, is a
distinguished public speaker and famous raconteur. He owns a string of
thoroughbred racehorses, many hand-picked by his wife, Chryss Goulandris,
and has an art collection estimated to be worth €150m that includes work by
painters such as Monet.
Sean Quinn is Fermanagh born and bred, married to Patricia, a local
sweetheart, and lives on a large, well appointed house on the family farm.
He has spoken publicly once in the past decade, at a function organised by
the Cavan County Enterprise Board, and he does not use a mobile phone.
He famously relaxes by walking with his two dogs in the mountains and going to
local Gaelic football matches. He plays a game of cards, 21, in a local pub,
where his losses are stopped at €5, and where he must cross the yard to use
the toilet.
Socially, O’Reilly and Quinn are worlds apart. Financially, however, in the
past 18 months, the two men have been in exactly the same boat — both of
them have lost close to €1 billion in the worst market crash in the history
of the Irish stock exchange. Investments have been ravaged. Both are
learning that these are not times to be heavily indebted to banks.
However, for both men, among Ireland’s richest and most successful, there are
some things that are more important than money, even the large amounts they
have lost. In very different ways, Quinn and O’Reilly are fighting to
preserve illustrious business careers.
THIS weekend, Quinn, whose interests range from cement factories in Cavan to
shopping malls in Hyderabad in India, received the largest fine ever levied
by the Irish Financial Regulator.
The regulator found that Quinn Insurance, a company controlled by the Quinn
family, had extended “unauthorised loans” of €229m to other Quinn family
companies to buy shares in Anglo Irish Bank.
The fines, €3.25m on the company and €200,000 on Quinn personally, are pocket
money to a company with assets of more than €3 billion and to Ireland’s
richest man. They are dwarfed by the €829m loss that Quinn has suffered on
his disastrous investment in the beleaguered bank.
It is the principle, however, that matters. Quinn has stepped down as chairman
and director of Quinn Insurance. It is not known if this was demanded by the
regulator.
The tycoon feels contrite but also victimised. He said that he was “very
disappointed with the decisions” he made “in overexposing ourselves to
equities [shares].”
“While I accept that I made mistakes, I feel that the levels of fines do not
reflect the fact that there was no risk to policyholders or the taxpayer but
are a result of the pressures existing in the current environment,” Quinn
said in a statement. “However, we will pay the fines and move on.”
Peter Oakes, a director of regulatory consultant Compliance Ireland Regulatory
Services, described the fine as a watershed. “The fine and the seriousness
of the matter [may] be gauged by the fact that the total penalty is almost
70 times higher than the penalty against Irish Nationwide Building Society
[the previous highest fine to date],” he said.
This is not the first time that Quinn has diced with the stock markets and
lost. At the end of the 1990s, his then fledgling insurance operations were
heavily exposed to the over-inflated market in technology shares. At the
time, his main financial adviser was his brother, Peter Quinn, a former
president of the GAA. Peter Quinn described Sean as “an eternal optimist,
which is necessary in business”.
By 2001 the stock market losses were such that they threatened the future of
the insurance business. It lost €48m on income of just €126m in 2001. Sean
Quinn put up a large part of his personal fortune to boost the reserves of
the insurance business. It was a masterstroke. Quinn Direct, best known for
offering competitive motor insurance deals to young drivers, exploited the
subsequent upturn in the insurance industry like no other.
Its profits since 2002 have topped €1.1 billion. With his cement business
benefiting from the construction boom and his empire in glass, pubs, hotels
and plastic also booming, Quinn’s personal wealth swelled to more than €3
billion, according The Sunday Times Rich List.
The success gave Quinn the confidence and financial resources to make the
biggest bet ever on the Irish stock market.
Quinn was a client of Anglo Irish Bank, an unabashed admirer of its “can
do”approach to backing business. Many of the bank’s clients shared the same
view and took stakes in the bank. Throughout the economic boom, Anglo’s
share performance was stellar.
When Irish bank shares started to fall from February 2007 onwards, it was
perceived that the declines were because of international nervousness about
the Irish economy. Quinn, a big player in the economy, decided to back the
bank, and Ireland, confident that its share price would rebound strongly.
The Cavan man chose to invest in Anglo though a special financial instrument
called contracts for difference (CFDs). Offered by international investment
banks, CFDs are the preserve of the wealthy and professional hedge fund
investors. They allowed Quinn to borrow up to 80% of the money to buy the
shares in the bank.
This debt allows investors to maximise profits, but equally they can greatly
accentuate losses. In addition, when the underlying share price falls so
does the value of the lender’s security. That is when investors are called
on to put more cash on the table, known as margin calls.
These high-risk, high-return CFDs have other advantages. They allow investors
to build up stakes in public companies discreetly. As they are backed by
expensive borrowings, CFDs are really considered appropriate only for
short-term investments.
Market observers say there is no doubt that Quinn was “punting”, betting that
Anglo Irish shares would rise and that he could make a quick and sizeable
profit. From the summer of 2007, rumour spread through the stock market that
Quinn had built up to a 15% stake in Anglo through CFDs and at a cost of €2
billion. Neither bank nor businessman would confirm or deny the story.
“We have investments in a number of different companies and are not making any
comment,” a Quinn spokesman said. At this stage, it was purely a personal,
family investment, distinct from the activities of his insurance company,
which, as a matter of course, invests in the stock market. But it was an
enormous personal punt that was about to go horribly wrong.
The collapse of Northern Rock in September 2007 brought a whole new dimension
to Quinn’s investment. There was now a much bigger picture. Globally,
banking stocks would begin the huge declines that continue to this day.
Anglo would be hurt more than most, falling 90% in a year.
It is estimated that Quinn would have been carrying borrowings of more than
€1.4 billion on his Anglo investment. As the Anglo share price fell, he
would have faced repeated “margin calls” from Credit Suisse, and a number of
other lenders, looking for hundreds of millions of euros. As 2008 dawned,
Quinn was under significant financial pressure. He needed to raise money.
In May, Quinn Insurance made the loan of €288m, most probably to meet a margin
call. By June, as the credit crunch deepened and share prices fell sharply,
the Financial Regulator began its investigations. It is understood that
Quinn was encouraged by the regulator to clear all his borrowings by
converting his CFDs into shares. He has done this.
It was the discovery of the unauthorised loan that led to last week’s record
fine.
THE root cause of the challenges facing the O’Reilly empire — similar to that
creating Quinn’s problems — is also debt, this time corporate.
Earlier this month, Waterford Wedgwood, a “trophy” business more than 50%
owned by O’Reilly and his brother-in-law, Peter Goulandris, struggled to
raise €5m from existing company shareholders to back yet another rescue plan
for the luxury goods group.
“This is the biggest tabletop company in the world,” O’Reilly told Time
magazine in 2007. “We’ve got fantastic brands.”
However, if Waterford does not raise €78m from outside investors by the middle
of December, it risks defaulting on its banking agreements. Waterford owes
its banks €540m and is struggling to make enough profit to pay the interests
and pay-down loans.
O’Reilly and Goulandris have invested at least €330m of their personal
fortunes in Waterford Wedgwood since 2004. Based on the current stock market
value of the company, the men have lost close to €300m on their investment.
Shares in Independent News & Media (INM), publisher of the Irish
Independent and Sunday Independent, have also fallen dramatically in the
past few weeks as media shares plummeted. In total, O’Reilly’s near 30%
stake in INM has fallen by almost €700m from its peak, achieved in May last
year.
INM, still very profitable, has debts estimated at €1.4 billion. The problem
for O’Reilly is that to refinance these loans and bonds will now be much
more expensive because of the credit crunch. Merrion Capital, a Dublin
stockbroker, said last week that the company should reduce its debt by
cutting or abolishing the dividend that INM pays on its shares. That would
hit O'Reilly in the pocket. These dividends were worth €26m to him
personally last year.
Apart from threats to his personal income, O’Reilly is facing a continuing
threat to his control of the newspaper group from rival media magnate Denis
O’Brien. Last week, O’Brien, who Gavin O’Reilly, Sir Anthony’s son, once
called “a gnat”, took advantage of Independent’s low share price to buy 3m
shares and increase his stake from 24% to 26%.
O’Brien, of course, has still not declared his intentions where INM is
concerned. Asked if he intended to buy control of the media company, he
replies that not even his wife knows his intentions in that regard.
But if he wants to make an assault on O’Reilly’s empire, he certainly has the
means. O’Brien last year realised €800m in cash from refinancing his
Caribbean-based Digicel mobile phone group. Given that O’Brien already has
significant media interests in Ireland, O’Reilly may end up relying on the
government to fend off the invader. There is an old stock market adage that
a company’s best defence to a takeover is its share price. Right now, INM’s
defences are weakened. Waterford Wedgwood’s are completely flattened.
BOTH Quinn and O’Reilly are still rich men, and continue to control some of
Ireland’s largest and most successful businesses and neither will lie down
easily, but there are tough times ahead.
Quinn’s financing of his investment in Anglo Irish bank, while a customer of
the same institution, will likely face further scrutiny. Joan Burton,
Labour’s deputy leader, has called for a full investigation into the share
dealings.
Events over the next 12 months, meanwhile, at both Waterford Wedgwood and INM
will go some way to determining O’Reilly’s business legacy.
And remember this. If our billionaires can’t battle their way out of the
current economic downturn, what hope is there for the rest of us?
Wheel of fortune turns nasty
Michael Taggart
Last year’s Ernst & Young Entrepreneur of the Year faces tough times. Last
week, the banks appointed an administrator to Taggart Holdings, his
construction company. Taggart was worth €174m jointly with his brother John
on last year’s Sunday Times Rich List, but his company now owes an estimated
€150m.
Michael O’Leary
O’Leary sees the downturn as an opportunity. It will encourage passengers to
desert higher-price airlines, he predicts. If fleet prices collapse, he
might open a long-haul service to the US, he says. Ryanair’s shares were
worth €5.65 a year ago and are now at €2.65. His loss is estimated at €200m.
Has he lost his midas touch?
Eugene Murtagh
When Kingspan’s share price peaked in May 2007 Eugene Murtagh’s shares were
valued at about €800m. Since then Murtagh has seen about €422m written off
the value of his holding. Murtagh, 65, stood down as chief executive in
2005, but did not insulate his personal fortune by cashing in shares before
the slump.
