It isn’t a question of whether Gavin O’Reilly was pushed or jumped – from his position as chief executive of Dublin-based Independent News & Media (INM) – but rather of precisely who pushed him. Certainly Denis O’Brien, the Irish telecoms billionaire who owns 22 percent of INM, played a significant role in prizing O’Reilly out, but it seems certain that the more prosaic explanation for O’Reilly’s departure was that the board believed he was not the man for the job.
The “job” is rescuing INM, which publishes Business Report, from the mountain of debt built up over years as a result of generous dividend payments, share buybacks and acquisitions. The debt, which had been tolerated in the grandiose Celtic Tiger days, rapidly became a crippling burden when the global financial crisis broke in 2009.
While O’Brien would have encouraged the board to believe O’Reilly was not up to the job, it is likely that last year’s financial results, which were released last month, would have played the determining role.
In what appears to be a corporate version of the dismal situation facing so many EU economies, including Ireland, INM is caught in a vicious debt trap. Extensive cost-cutting and asset sales, in an extremely tough trading environment, essentially sees management trying to shrink the company out of its debt problems. This strategy enabled it to pay off E46.8 million (R482.9m) of its debt.
However, after all the cutting and shrinking, INM still has E426.8m in debt. In terms of its agreements with its funders, it is obliged to repay over E400m in 2014.
While the view in the O’Brien camp is that there are still a lot of costs that can be cut out of the Irish operation, it is difficult to imagine how the group’s cost-obsessed management could devise a growth strategy that would resolve its debt problem before 2014.
From a South African perspective the reason O’Reilly’s departure is significant and not just another entertaining instance of boardroom machinations, is that it creates uncertainty around the future direction of the group, including ownership of its wholly-owned South African business.
While O’Brien played a crucial part in O’Reilly’s departure, it is evident that he is not in control of the situation at INM. The board is in control. Which is as it should be. But for the past 37 years that board has been in the control of the O’Reilly family. It no longer is.
Last year in what was probably the most significant INM board move in decades James Osborne, who had no previous involvement with the group, was appointed to replace outgoing chairman Brian Hillery. Almost as significant was the dramatic and high profile ousting of Leslie Buckley at the annual general meeting in June. Buckley, who is not only extremely competent but perhaps more significantly a long-term friend and business associate of O’Brien’s, was one of three directors who represented O’Brien on the board since 2009.
While O’Reilly argued vehemently that he had nothing to do with the shareholders’ decision to oust Buckley, a Dublin commentator noted that the move “has O’Reilly’s finger-prints all over it”. The move certainly added to the tensions between O’Reilly and O’Brien.
It is unclear who was behind Osborne’s appointment, but it appears he has played an independent role from day one. Indeed the “O’Brien camp” is reported to have been pleasantly surprised by how independent and effective he has been.
One critically important reason why O’Brien is not in control, or certainly cannot be seen to be in control, relates to the Irish government’s concerns about diversity of media ownership.
The Irish government is currently drawing up legislation to deal with media diversity. It is unlikely to cut O’Brien any slack. Not only does O’Brien own extensive radio operations in Ireland, but he was a key witness in a government-appointed investigation into possible corruption in the allocation of a mobile phone licence that he was awarded back in the 1990s.
The Tribunal found that it was highly likely O’Brien won the contract as a result of payments he made to the then minister of communications.
INM’s Irish newspapers’ coverage of the tribunal is believed to have contributed to O’Brien’s interest in acquiring control of the group.
The departure of O’Reilly may mean that there is no obvious champion of the notion that INM is a global media group. Despite the crippling need to pay off debt, the O’Reilly-controlled board has rejected numerous approaches made by potential South African buyers since 2009.
The board, without O’Reilly, might continue to reject the sale of what were previously deemed “core assets” or it may be prepared to consider selling the South African operation as well as INM’s 30 percent stake in Australian APN.
The sale of its APN stake would be a reasonably straight-forward portfolio transaction and on the basis of the current market price would generate around E120m for INM. This might provide sufficient comfort for the group’s funders or it might be regarded as the beginning of a more aggressive debt-reduction exercise that would include INM South Africa.
Valuation of the South African operations is complicated by the lack of published data. The 2011 financial figures revealed that South Africa generated operating profit of E37.6m for the group.
Allowing for a variety of assumptions this would point to a valuation for the business of between R2.5bn and R3bn. Debate over the precise amount would include reference to the fact that, although profits have declined in recent years, INM South Africa contains many of the oldest and most valuable English-speaking newspaper titles in the country. Against that is the uncertainty the industry is facing and the fact that there has been little investment in the operations over the past years.
Local analysts say it is likely that, after making some provision for tax, the bulk of the approximate R4.5bn operating profit that INM South Africa has generated since it was delisted from the JSE in 1999 made its way to Dublin with minimum amounts invested in South Africa.
The R4.5bn represents an extremely attractive return on the approximate R650m that INM initially paid to acquire the operations. Employee numbers since the initial move have been reduced from about 5 000 to 1 700.
It might be some weeks before the board indicates whether it wants to retain INM South Africa and continue using its operating profit to pay down debt at the Irish parent or take a more aggressive approach to cutting the debt and sell off South Africa as well as Australia.
But one thing is clear, the latest boardroom machinations in Dublin will certainly cause some activity in Johannesburg.