Denis O'Brien raids the O'Reilly fortress
For the first time in 30 years, Tony O'Reilly's sole control of Independent News and Media may now be under challenge from one of O'Reilly's most bitter rivals.
In the summer of 2003 Tony O'Reilly wrote to Denis O'Brien offering personal congratulations on the latter's successful chairmanship of that year's Special Olympics World Games in Ireland. He was mistaken if he expected that the conciliatory private letter, which also made favourable reference to O'Brien's father Denis senior and his swimming at Blackrock baths during his youth, would help repair what had become an increasingly fractious relationship between two of Ireland's richest men.
O'Brien responded with his own letter that made it clear he was in no mood for reconciliation. He recited a list of perceived injustices against him, carried out by newspapers in the Independent News & Media (IN&M) empire. Still smarting from his defeat to O'Reilly in the battle to buy Eircom two years previously it was clear that O'Brien was in no mood to accept a gesture of truce.
Soon afterwards – on 23 October 2003 – he gave an interview to the Irish Times in which he made reference to O'Reilly's "ragbag of investments" and complained about his newspapers making "outrageous allegations against me and my companies". Solicitors acting on behalf of O'Brien have written to papers under O'Reilly's control on occasion complaining about coverage of O'Brien's appearances at the Moriarty Tribunal. The Tribunal is investigating the circumstances by which O'Brien's Esat Digifone company acquired a mobile phone licence from the State a decade ago, the subsequent sale of which resulted in a €250 million profit for Denis O Brien personally – the basis of his existing fortune (he himself makes the point that his stewardship of Esat Digifone was the main generator of this profit).
The most significant investment in O'Reilly's portfolio (once other family member shareholdings are included) is his 28 per cent shareholding in Independent News and Media (IN&M), an investment that allows him control of the company despite the presence of many other shareholders. It is worth about €530 million to him at closing share price of 251 cent, on Tuesday, 10 January (placing an overall value on the company of just under €1.9 billion). A little more than two years after those disparaging comments O'Brien himself has emerged as a significant shareholder in O'Reilly's most prized company.
While 3 per cent is a small share, it cost O'Brien nearly €56.5 million to purchase those shares quietly, something that signifies real intent.
In hitting three per cent he reached a level where an announcement to the stock exchange – made at the close of business on Tuesday, 10 January – was required. IN&M offered no comment in making the disclosure – as it fell to it to do – although that in itself is not unusual. It had learnt of O'Brien's investment only earlier that day which implies it was taken by surprise at the very least. The share purchases has started quietly last November and the secret stuck. It is likely that any more shares he buys will be more expensive now that his identity as a buyer is known.
While O'Reilly likes few things better than a rising share price – because it boosts further his already vast wealth– the circumstances of the latest hike in IN&M's value must be disconcerting to him. It is most improbable that O'Reilly welcomes O'Brien as a shareholder in his company given the nature of their relationship. He now faces an uncomfortable degree of uncertainty, that could last some time, as O'Brien decides what he will do next.
It is possible that O'Brien will have increased his shareholding further by the time this edition of Village is published and there was speculation on Wednesday morning that he was in the market to buy more shares. Once he reaches a 5 per cent threshold he will be required to announce publicly each further 1 per cent of IN&M he has purchased. The question then would be how far would he prepared to go. Each 1 per cent of the company – at current prices – will cost him about €20 million and more if his stake increases sizeably, big money even for someone of O'Brien's resources.
So what is he up to? Clearly O'Reilly and IN&M have no idea, which puts them at a disadvantage. For the moment they are staying quiet. O'Brien's spokesman refused to give any indication of his client's intentions when contacted on Tuesday evening. This allows for rampant and unchecked speculation.
Is O'Brien motivated by commercial considerations, a belief that IN&M's share price is undervalued and that he can earn a return on his money by buying shares cheaply? Media stocks worldwide have suffered from the uncertainty about the effect of a migration of advertising to the internet, but IN&M's strong revenues in Ireland and investments in new markets, such as India, may leave it better placed financially than other pure newspaper companies. The arrival of the free-sheet Metro in Ireland does not seem to have adversely affected circulation of IN&M's daily tabloids or their revenues – although whether this continues to be the case remains to be seen. If O'Brien believes IN&M is undervalued he may consider it worth his while to keep buying shares. The question then is how many.
If he buys a sizeable amount would he then be happy as a passive shareholder in the company or would he want representation on IN&M's large board of directors, one that is populated at present with many O'Reilly family members (three sons) as well as friends? If he were to build his shareholding to say 20 per cent for example, he would be entitled to demand a number of seats, something that would be unlikely to appeal to the O'Reillys.
Or could he sell whatever shares he assembles to another party, also not to O'Reilly's liking, at a future date? There are potential buyers. While the Daily Mail General Trust (DMAGT) has been rumoured for years as a possible likely bidder for IN&M it was never going to mount a first offensive itself. But if O'Brien softened things up a bit it might be interested in taking the shares from him.
And there is no doubt but that DMGT is interested in the Irish market but has found its existing foray highly expensive. Ireland on Sunday has lost over €54 million in three years, according to the latest published accounts, and the figure is certain to have risen since. The pending Irish edition of the Daily Mail – which is worrying IN&M's local executives sick – could take tens of millions more in losses to establish, so it might be better value for money to try to buy O'Reilly's dominant player in the Irish market.
Or could O'Brien look to take ownership of the company? Could he want to replace O'Reilly as the biggest media owner in the country? That, however, would be almost impossible to achieve unless O'Reilly decided to sell.
There is no chance of that. O'Reilly is the executive chairman of IN&M, his son Gavin is chief operating officer and Tony jnr and Cameron are non-executive directors. This may be a publicly quoted company but it is a family business. As well as large salaries – Tony senior earned €1.3 million in 2004, the last year for which there are published accounts, and Gavin earned €1.13 in the same year – the family also draws large dividends. The O'Reilly shareholding provided about €15 million in dividend income the same year.
There are other perks: O'Reilly has use of a private jet owned by Independent that he uses for visits to its newspapers in Australia, New Zealand, South Africa, Britain and now India. (O'Brien owns his own jet personally). Ownership of IN&M also confers a degree of prestige and influence in those countries.
Even if O'Reilly refused to sell his shares O'Brien could still become majority shareholder by buying everyone else's. But he would not be able to obtain a level that would give him control of IN&M's assets for his own funding purposes. To take control of the assets of a public owned company it is necessary to get a minimum of 80 per cent of the shares – without which it would be impossible to raise borrowings against those assets to cover the cost of the purchase of the shares.
The maximum O'Brien can get if O'Reilly refuses to sell is 72 per cent of the shares – which means O'Brien would to have borrow €2.5 billion or so to fund the purchase without having IN&M's assets to use as collateral. That seems most improbable.
It could be that O'Brien's tactics are somewhat similar to those used by Sean Dunne in the recent takeover battle at the Jurys Doyle Hotel Group. Dunne got what he wanted – land owned by the group – by buying a large shareholding and then selling it for a large profit to the Doyle family when it was forced to buy the group outright.
O'Brien could buy sufficient shares so as to make O'Reilly buy more shares himself to take majority control of the company. That would be an expensive exercise even for O'Reilly (who can call upon his billionaire brother-in-law Peter Goulandris for support) and it would also require buying from O'Brien who would turn a substantial profit, at O'Reilly's expense, in the process. But there are also substantial financial risks to O'Brien involved in that strategy.
It could be that O'Brien is merely looking to cause upset and trouble to an older competitor, while also turning a big profit while doing so. Creating devilment while making money is a seductive combination for his ilk.
O'Reilly has never owned more than 28 per cent of the shares in IN&M over the last 30 years, believing it was possible to maintain sufficient control while not having to spend the money to buy the balance of the shares. That is the advantage of controlling a public company but the downside is that unwanted others can buy shares too.
A battle between O'Reilly and O'Brien for control of IN&M, if one is to commence, would be a ferocious spectator sport. Both parties would want to be seen as winners. While money is critical, so is ego. This would be the battle of the old bull and the young bull in the Irish field.
Both will be looking to other pillars of Irish society, particularly in banking, for support. All sorts of relationships would be called into play. Both men are powerful but not necessarily popular. Some people would be forced to choose sides. Some might prefer to take none.
O'Reilly's stewardship of IN&M, and the style of journalism engaged in at some papers, has aroused much controversy over the years. The handling of Liam Lawlor's death by both the Sunday Independent and the Sunday Tribune impressed few but was seen by some, rightly or wrongly, as a logical conclusion to a trend of over a decade.
Again rightly or wrongly, many people in business and politics have been upset by what Independent titles have published over the years and even if O'Reilly had no direct involvement in the content he has been blamed in some quarters for not reining in some editors. That said, had he done so he might also have been subjected to accusations of undue editorial interference. There have also been allegations, without evidence, of his requiring his papers to run copy favourable to his business interests.
Whatever the case he may find some people no longer prepared to grant him favours when needed – as a man of nearly 70 he may also find that many of his old supporters and friends are no longer in a position to help him.
There is no evidence either that O'Brien has used his radio stations – which occupy a position of far lesser influence in Irish media – to further his own business or political agendas. Public disquiet about O'Brien has focused on his (legal) avoidance of a €55 million tax bill by going to live in Portugal shortly before the sale of Esat Digifone.
He has also featured heavily at the Moriarty Tribunal. While there has been no conclusive evidence to suggest he benefited from a rigged competition to award the second mobile phone licence in 1995 it has been shown that associates of his attempted unsuccessfully to transfer money from his accounts to former minister Michael Lowry. He has angrily denied any wrongdoing and has demanded that the Tribunal cease its work. He was recently appointed as deputy governor of the Bank of Ireland, which suggests his difficulties have not affected his reputation as a dynamic entrepreneur in business circles.
The fight for Eircom five years ago ended in victory for O'Reilly, showing that the old bull had more clout and influence than the young one at the time. O'Brien had moved first to try to buy Eircom but O'Reilly came in as part of a different consortium. He managed not just to do a deal acceptable to the worker shareholders but also got favourable tax treatment from the government for the profits accruing to the workers.
O'Brien later affected to have been untroubled by the Eircom outcome – "My business interests in the Caribbean are more valuable than what I would have created out of owning a bit of Eircom," he said – but there is little doubt but that he would have liked O'Reilly's €60 million profit. He also wanted the kudos that would have been involved in winning and hated the perception of having been beaten.
What happened at the past in Eircom bears no relevance to what will happen at IN&M now. O'Brien might move to acquire shares quickly or he may choose to keep everyone in suspense. His main advantage is that O'Reilly does not know what O'Brien's intentions are or when he will exercise them. O'Reilly's advantage is that he has 28 per cent of the shares and the board on his side. Nothing may come of all of this but that is unlikely; people like O'Brien do not buy 3 per cent shares in public companies controlled by rivals for the heck of it. An interesting year in Irish media and business beckons, to put it mildly.
Matt Cooper presents The Last Word on 100-102 Today FM, Monday to Friday, 5pm to 7pm