BACKGROUND:Anglo Irish and Ulster believe store's survival and sale is best way to maximise loan returns
STATE-OWNED Anglo Irish Bank and Ulster Bank have sought to take control of the landmark Dublin store Arnotts to avoid the nuclear option of appointing a receiver to the business and to maximise the best return on loans of more than €250 million.
Both banks are understood to believe that, while Arnotts is an iconic brand and popular store with a fighting chance of surviving the recession, the retailer has been smothered with bank borrowings for an ill-fated property expansion.
The problem with the alternative to its rescue plan – appointing a receiver – is that this would involve tough trading, a possible closure and job losses, all of which can hinder any prospect of selling the business on. The banks will want to recover as much of their loans as possible and a sale of the business is the exit strategy for both institutions once the debt pile has been restructured, a new management team is appointed and its long-term property plans are put in cold storage.
“It is not in their interests to damage the retail business because that is what will earn their way out of this problem,” said a source. The hand-holding approach shown by the banks means that the 950 jobs at Arnotts will be protected as the business will continue trading until it is eventually sold on, most likely to an international retailer.
Anglo and Ulster may appoint new management over time to replace the chief executive of Arnotts’ retail business, David Riddiford, and the chief executive of Arnotts’ holding company, Brian Kearney.
US-based Paladin Capital and its retail expert Mark Schwartz – whose business is buying and selling distress retailers – was recruited by Anglo earlier this year to help restructure Arnotts.
For Arnotts, it was a case of a big property bet going wrong. The timing of the firm’s €800 million plans to redevelop the block around Arnotts bordering Henry Street, Middle Abbey Street, Liffey Street and O’Connell Street could not have been worse.
The project, to be known as the Northern Quarter, was launched just before the financial crisis hit and additional borrowing to finance the project became impossible to secure, retail spending collapsed and the commercial property market crashed. The ambitious plan has been put on hold and the debts behind it frozen while the banks initially put the retail business on a sound commercial footing.
Some 55 per cent of Arnotts was owned by barrister Richard Nesbitt and his family. The remaining shares were held by Anglo and Boundary Capital, the investment firm formerly led by financier Niall McFadden.
Their shareholdings in the group will effectively be wiped out if the two banks secure control over the retail business.
The transaction is technically a form of debt-for-equity swap where the banks take a stake in the company in return for writing off their debts. The banks are taking control rather than full, immediate ownership, though they have options and so-called warrants to take ownership at some point in the future.
The banks have structured the deal in such a way that Anglo and Ulster Bank would each own 49.5 per cent of the new controlling company, while the remaining 1 per cent will be held by the existing shareholders. While the 1 per cent stake gives some small level of upside from any recovery, this mechanism has been largely structured to maintain the retail business as an entity independent of the banks.
The lenders have taken control through this structure as it allows Anglo to keep its interest in the retail business off its books. However, the move raises competition issues which is why the bank awaits European Commission approval by August 9th. The commission could either approve the transaction allowing both banks to take control or extend its investigation by a further 90 working days.
It is believed the Minister for Finance, Anglo’s shareholder, took a specific interest in ensuring the retailer remains open. A source stressed the importance of keeping such a prominent retail location open – not just for the jobs it protects but for the signals it sends about the retail sector.
View from the shop floor - what the customers said
ARNOTTS SHOPPERS in Dublin yesterday were surprised, disgusted and curious about whether they might now own the historic store after it emerged that Anglo Irish Bank would be taking control of it.
Shopper Jackie Cunningham from Drumcondra said she was surprised and curious when she heard the news.
“Does that mean we own Arnotts?” she asked.
She said she didn’t know the store was in so much trouble, and felt it was ridiculous that Anglo Irish would be involved with it.
“The whole thing is a joke, this Government should be gone. I’ve had enough of them,” she said.
Asked how he felt about Anglo Irish having control of the Dublin store, Larry Dunne from Balbriggan thought it was a very “delicate question”.
“How does anyone feel about Anglo taking over anything?” he asked.
He wondered about the bank’s long-term plan for such an important city centre site. He would have “very little confidence at all” in their ability to run the store, “because of their history of economy with the truth”.
“It’s here so long as it is an important magnet for other businesses in the area; if anything happened to it there would be a knock-on effect,” he added.
Elizabeth Ennis from Portmarnock, who has been shopping at Arnotts since she was “knee high”, said she was disgusted by the whole thing.
“I know they say their jobs are safe, but I don’t believe it,” she said. “The last of our own is gone now, it’s all foreign shops.”
Sisters Mary Martin and Joan Kaye from Clontarf and Sutton already believed the store had changed too much.
“I miss the old crowd in it, it’s not the same now, they only cater for youngsters,” Ms Kaye said.
She wouldn’t be deserting it, however. She didn’t really care who owned it any more, but wouldn’t like to see it close.
Recent changes at the store had attracted younger shoppers, such as Aishling Fahey, from Sutton.
“I get a fair bit here,” she said.
“It didn’t used to cater for young people but it does now, I love Arnotts and I hope it doesn’t close.”
Emer Fox from Harmonstown said she thought it was not good for Arnotts to be publicly associated with Anglo Irish.
“People are still very angry with Anglo Irish Bank,” she said.
But Pat Cleary from Ballyfermot was more concerned about the possibility of increased prices.
“I always shop in the basement for the bargains, I wouldn’t like their prices to go up,” he said.
– FIONA GARTLAND
