Inside the world of business
Ulster Bank offers the basis for a genuine third force
THE NOTION of a third banking force emerging from the current carnage continues to occupy number crunchers. The most likely scenario is a combination of Permanent TSB with EBS and Irish Nationwide building societies; preliminary discussions between EBS and Irish Nationwide are reported to have begun. The so called “super mutual” would have 31 per cent of the mortgage market and a small presence in retail banking, approximately 5 per cent of current accounts.
It would have sufficient scale to offer an alternative to the two main banks in the mortgage market, but would have no presence in the business market, specifically the small and medium enterprise sector.
The other proposal on the table is the combination of the three mortgage lenders with Bank of Scotland which has a reasonable share of the business market, although there is some debate as to how much of its business book is really quasi-property lending. Bank of Scotland Ireland have floated the idea, which is seen as offering its new owners an exit from the Irish market. Paradoxically, the main attraction of the combination is that these same owners, Lloyds, have the wherewithal to make it happen and would end up being one of the largest shareholders in the new entity. That said, the four-way combination would only have 10 per cent of the business market.
A more attractive combination from the perspective of creating a new business bank of meaningful scale would be to replace Bank of Scotland Ireland with Ulster Bank. This iteration of the third force would have 20 per cent of the business banking market, 46 per cent of the mortgage market and 15 per cent of the market for current accounts.
It would be a genuine force and able to offer real competition. But it’s an idea that appears to have found little favour with Ulster Bank management, who have had more than enough on their plate. But the recent comments from Royal Bank of Scotland chief executive Stephen Hester, to the effect that Ulster may try and shift some of its assets into the National Asset Management Agency, could be seen as a sign that RBS now wants to engage with the Government over the future of its Irish subsidiary.
Teeling wins in David versus Goliath battle
Yesterday was a good day for John Teeling’s African Diamonds. It found a new partner – Toronto-listed Lucara – for its AK6 diamond mine in Botswana, a move that ends its often fractious relationship with mining giant De Beers and should accelerate development of the project.
Its shares rose by almost 10 per cent in London as investors reacted positively. This could well prove to be a key turning point in the history of Clontarf-based African Diamonds.
It spent six years prospecting with De Beers in Botswana with some success. But the mining giant’s desire to long finger the move to production at AK6, to suit its own needs, threatened to leave the Irish listed company swinging.
It was a David versus Goliath clash of opinions that often emerges in the resources sector as the small licence holder is in danger of being squeezed by the production giant. At 63, Teeling wasn’t prepared to hang around. Remarkably, he has engineered a solution that sees De Beers surrender its 71 per cent interest in the project while boosting African Diamonds’ share in the mine to 40 per cent.
In Lucara – which is backed by Lundin, a $10 billion-plus global mining group – he has secured a serious industry partner. Together they will look to develop the mine at a cost of just under $90 million. This is roughly one-third of the price De Beers has planned to spend on the mine.
AK6 has the potential to become a million-carat-a-year mine after production starts in 2011. Its life will be at least 12 years. It remains to be seen how much this mine will ultimately be worth to African Diamonds. A lot will depend on the speed of recovery in the global economy and the demand for diamonds, particularly from China and India. But the portents are good. After years of traipsing the globe promoting a variety of resource minnows, Teeling might suddenly have landed himself a big fish.
Reihill frustrated at deep TVC discount
TVC executive chairman Shane Reihill admitted he is a little frustrated with the fact that the investment holding company’s share price has been lagging the value of its assets.
The half-year figures released yesterday illustrate the ground for his frustration. On September 30th, the mid-point of its financial year, TVC had an equity value per share of 87 cent, while its shares were selling for 60 cent.
It was a 31 per cent discount, when you include all its cash and investments. Allied to that, the group has no debt.
Assuming that the company’s unquoted investments have the same value as in September, €16.6 million, and taking yesterday’s closing prices in Dublin, TVC was worth 94 cent a-share, while it closed at 64 cent, a similar discount to the half-year stage.
Granted, this is a back-of-the-envelope calculation, but it’s unlikely to be too far off the mark, particularly given that its stakes in software specialists Norkom and broadcaster UTV were worth just over €50 million, while TVC’s market capitalisation was €64 million.
Added to the €50 million and the €16.6 million, there is cash and liquid investments, totalling €29 million in September, all of which makes the discount look very deep indeed.
But is there not a risk that companies such as TVC will always be discounted, purely because investors will not see any potential upside if their share prices is a precise reflection of the their assets’ value?
Reihill does not think so, at least not in relation to TVC. He points out that it has dominant stakes in both Norkom and UTV, which he argues should be worth a premium, and says that you have to take account of the fact that it is both debt-free and has plenty of cash.
Reihill and chief executive John Tracey are keen to tackle the issue. The company has a number of options: passing on that cash to shareholders through a buyback; or going private, which is not ruled out.
The other option would be to find a fresh investment, but the company says that the current climate is making that difficult.
TODAY
The Government is due to publish its Pre-Budget Outlook this afternoon. It will contain the latest official economic forecast as well as setting out the headline estimates for the cost of running the public sector next year on the basis of no policy changes.
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