McInerney built around a long history of adversity - The Irish Times - Mon, Jan 17, 2011

Whatever happens next for the housebuilder, it won’t be the first time since flotation that its backers have taken a hit, writes BARRY O'HALLORAN 

EVEN THOUGH the High Court has refused to endorse its rescue plan, there is still some chance that housebuilder McInerney could survive at a hearing today.

A new investor, Oaktree Capital, has offered its banks €25 million in full and final settlement of a €113 million debt. Mr Justice Frank Clarke ruled against this a week ago on the grounds that it was unfairly prejudicial to the banks. It has since emerged that State agency Nama is about to buy the loans, casting a different light on the banks’ position.

Irrespective of what happens, there will be very little left from the Irish business for shareholders. It won’t be the first time in its 40-year history as a public company that its backers have taken a hit.

Thomas McInerney was one of the best-known names in Irish construction when it floated in December 1971, a year after its then managing director, Ambrose McInerney, and his fellow board member, Frank Cleary, signalled their intention to list the firm on the Dublin market.

As well as being responsible for around 10 per cent of the homes in each of the Republic’s main cities, Thomas McInerney had built Croke Park’s Hogan Stand, one of Shannon airport’s runways and part of the University College Dublin complex at Belfield.

By the mid-1970s, its operation in Britain was the biggest local authority housing contractor in London.

When the flotation was first raised in December 1970, Ambrose McInerney said that the company would go to the market when conditions were right.

This took another 12 months, but when it happened, its share offering was five times oversubscribed, despite the fact that postal delays meant some bids from Britain did not get to Ireland on time.

The shares were priced at 66 pence and raised £2.2 million. The company subsequently announced that 1971 sales were £15 million and profits were £1.15 million.

Growth continued over the next few years, but in 1974, McInerney lost £3.3 million and had borrowings of £12 million. The company was forced into a fire sale of assets such as office blocks in Dublin and London and had to lay off 1,100 staff. To help ease the burden of debt, the McInerney family had to subscribe for £5 million in new shares.

Under this arrangement, the shares were equivalent to 8 per cent of the issued capital, but carried no voting rights. They were convertible in full voting shares after three years.

In a 1975 report that will sound familiar to people today, The Irish Times said that by the end of 1973, McInerney had geared up for a boom in building and property that failed to materialise, and it predicted that it could be in the “hands of the banks” for many years to come.

It didn’t quite pan out like that, McInerney turned the situation around over the next two years, and in 1978, branched out into civil engineering, with the purchase of a company called Public Works Ltd. At this stage it was also an active investor in the Middle East.

Ambrose McInerney stepped down from his executive role in the early 1980s and became non-executive chairman. Dan McInerney succeeded him as chief executive.

The group kept going through the 1980s, when building and property slumped in the Republic. Its contracting arm helped keep it going through this period, winning public and private sector-funded work at home and abroad, particularly in the Middle East.

It continued building houses, and developed Landsdowne Village, a collection of townhouses in Ballsbridge, Dublin 4, in the middle of the decade, which was one of the high-profile residential projects at the time.

Its problems came at the end of the decade. In early 1990, it warned the markets that the previous year’s profits would be lower than it expected. Subsequently it announced preliminary losses of £1.26 million punts.

On the basis that the company had prematurely booked some contracting profits, its auditors, Touche Ross, qualified their opinion of its accounts. The loss could have been around £2.2 million.

Worse was to follow. It began the new decade by announcing a £26 million loss for 1990, a year that the then chief executive, Sean Cannon, described as “horrendously difficult”. He blamed the deepest recession in Britain for 50 years. McInerney was forced to pull out of a collapsed British commercial property market, where it was an active player and which accounted for £14 million of the losses.

Similarly, activities in the Portuguese and Spanish leisure markets meant it had to make provisions against likely losses.

Its problems in Britain resulted in a long process that considerably diluted the existing shareholders’ interests in the group. This began in early 1991 when a group of banks took over 51 per cent of its British subsidiary, McInerney Homes, in return for foregoing a total of £37 million in loans.

The rescue plan did not work, and to avoid taking on £20 million of the £37 million liability, the group asked the bank to appoint a receiver to its British subsidiary at the end of the year. The following year, it agreed a restructuring that involved the issue of new ordinary shares and several classes of preference shares to the banks.

This meant shareholders faced a dilution of their interests. In other words, where they had once owned 100 per cent of the company, the deal left them with 44 per cent. Shareholders voted for it. The deal ringfenced its Irish operations from the problems that dogged the British business, and gave it a base from which it could start again.

Mid-way through 1994, a contingent liability relating to its holding in the Four Seasons in Villamoura in Portugal, and the breach of its banking covenants, left the group seeking more equity. The difficulties dragged on for two years and the subsequent refinancing led to shareholders being diluted to 4.5 per cent, although there was a claw-back under which they could subscribe for new equity.

By that time, it was 1996, and the Irish economy, which had been growing since the beginning of the decade, had taken off. Over the next period, demand for housing, particularly from first-time buyers, which became McInerney’s target market, began to rocket.

The company returned to growth, and during the following decade, began to expand in Britain again, this time focusing on the first-time buyer and social housing markets in the north of England, a business that it still has today.

It occupied a much less high-profile position in the Irish market than it had previously, although it still had one of more familiar brands in the house-building business. Its business model also avoided speculation and built houses to order rather than in the hope that people would buy them.

Nonetheless, when the property and housing markets collapsed, it found itself once again in breach of banking covenants, leaving it ultimately with no choice but to find a new investor and restructure the business. As this went on, it acknowledged that shareholders would face another dilution.

via irishtimes.com

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