WATERSHED
Once Waterford Wedgwood had a foot in the door of Government Buildings, the lobbying for help would become intensive. There were to be five subsequent meetings between Waterford Wedgwood executives and government officials in the coming months, a series of written communications and numerous phone calls. In February 2008, O’Reilly went to Government Buildings himself and met with Micheál Martin and Minister for Finance Brian Cowen. It was a difficult sales pitch, to put it mildly. O’Reilly had just announced 490 job losses at the crystal manufacturing plant in Waterford, but wanted support to protect the remaining 550 jobs. He brought with him a business plan that envisaged how things could be turned around in about two years if the company was given another chance, notwithstanding how all of its promises over the past six years had proven to be hopelessly optimistic.
O’Reilly was insistent that he was not looking for grants or equity, knowing that these would take more time and that any objections could lead to fatal delay. His idea was that the government should act as guarantor on new loans from the USA that he would source for the company, totalling €39 million, although it was possible that amount would have to be increased. In reality, everyone knew it would be difficult to get that money from the USA, even with the State guarantee, and that the loan would probably have to come from the Irish State. If the money was provided by an American bank, the chances of it being repaid were slim, meaning that the guarantee on repayment would almost certainly be exercised. It was an extraordinary request for Ireland’s apparently richest man to make, based on an implicit admission that he could not provide the guarantee himself, let alone new equity.
In going directly to government, Waterford Wedgwood had bypassed Enterprise Ireland and IDA Ireland as the usual conduits for State support to private business, although both were called in by the government to become involved. It was hard to see how Waterford Crystal fit the usual criteria for aid. For indigenous industry, support normally went to start-up and research-heavy organisations. For international industry, the emphasis was on profitable companies that would provide employment. The EU had strict conditions laid down as to the circumstances under which loss-making indigenous companies could receive support.
‘You couldn’t dismiss it, he was not some sort of fly-by-night, he had tried to save the company and put tens of millions into trying,’ said Martin. ‘But there was something almost naïve and desperate about what he was suggesting. He had left it too late.’
That didn’t mean that the rejection came immediately. As a minister who served the Waterford constituency, Fianna Fáil’s Martin Cullen was worried about the political implications in his native county. It was a view shared by other ministers. Cullen argued strongly that something had to be done. ‘We looked at every way possible of saving Waterford Crystal,’ said Martin. ‘The previous closure of the plant in Dungarvan had been ameliorated somewhat by the provision of new jobs in the county, but that was at a time when the economy was moving well. We feared that losing Waterford Crystal would do to that city what closing Ford and Dunlop had done to Cork in the 1980s. We got consultants in to look at everything, cash-flow, production, marketing, the lot. But Enterprise Ireland had no confidence in the management. And there was a problem with him looking for us to guarantee the repayment of loans. Normally you talk about equity, research and development grants, soft supports, but this was different, new ground.’
There were many practical issues. In this particular case, there was a fear of opening a Pandora’s box: that once one commitment was made to Waterford Wedgwood, further commitments would be required to protect that original promise. Propping up an ailing, privately owned company, especially when it had already shed about three-quarters of its workforce, might only postpone the eventual closure of the Irish manufacturing operations. Then, not only would this money be lost but there would be even bigger political hell to pay for giving money to a lost cause. There were also concerns that the money might be applied to the group’s non-Irish operations, particularly in the even worse performing ceramics businesses. The government could see that only a quarter of the group’s total turnover was coming from the crystal division – and while that was the only profitable part of the group, it wasn’t clear how much of that profit was due to the outsourced manufacturing rather than the Irish operations.
The group had admitted that it employed 1,300 staff in Indonesia for the same wage cost as 90 staff in Britain, itself a cheaper labour market than Ireland. How, in those circumstances, could it commit itself to continued manufacturing in Ireland?
O’Reilly’s personal status was also an issue. He was still perceived as filthy rich, even if that was not the reality. In the annual Sunday Times Rich List, published in April 2008, O’Reilly was ranked as the fifth richest Irishman, with assets worth €1.853 billion, an increase of €180 million on the previous year. The total pleased O’Reilly, who was always somewhat obsessed by his place on the list, but the ranking did not as he dropped from third, behind Sean Quinn, Galen Weston, John Dorrance and O’Brien. In any event, the built-in shortcoming of the Sunday Times rankings was highlighted by the absence of any estimate of borrowing, to provide a net assets rather than a gross assets estimate. And an assumption had been made, almost certainly incorrectly, that he remained a major shareholder in Heinz. O’Reilly was in something of a Catch-22 situation once again. If he boasted to government of his wealth, then he was giving it the opportunity to respond that he had his own resources at hand to save a private company. If he admitted his finances were stretched, then word would get out and it would undermine his campaign to keep control of INM.
Martin said O’Reilly was insistent that Waterford Crystal was ‘the original iconic Irish brand’ and ‘he couldn’t comprehend how the government would allow a brand like this to go down, that when you don’t have many Irish world-class brands, when it takes so much to create one, that you would leave it go’. O’Donoghue confirmed that this was the argument O’Reilly offered. It was an emotionally appealing argument, but the government wondered what real benefit would accrue to the country in trying to protect the brand. In any case, if any of that was true, then why wouldn’t the shareholders and banks do what was necessary to save it?
‘I think he had an old-style view of how business and politics interacted, going back to his experiences of the 1960s,’ said Martin. ‘You met and you got it sorted. He had too much confidence in the process and in the ability of the ministers to deliver, but this was not the way things were done in a modern government. He was never threatening in his personal behaviour. It was as an old teacher of mine in Cork used to tell me, “you can catch more flies with honey than vinegar”. He was charming and entertaining, but that didn’t count for anything.’
The belief was that the European Commission might block any guarantee as anti-competitive – citing unfair State aid that would disadvantage glassware-makers in other Member States – although Waterford quickly claimed that its sources said that the Commission was not raising this as a significant issue and would not veto State aid. This wasn’t exactly what the government needed to hear: if such support was allowed, it might create an expensive and possibly dangerous precedent, with other Irish and multinational companies in trouble looking for similar financial support.
Ahern was torn. He had his own political reasons for saving jobs in Waterford and he also wanted to remain on-side with the country’s largest media owner. But at the same time he couldn’t be seen to be financially supporting O’Reilly by providing special support for an unsuccessful investment. Ahern was already under considerable pressure about his own behaviour; while he might want to keep INM’s newspapers on his side, there would be enormous kickback from everywhere if he was perceived to be using State money to do that. In typical Ahern fashion, he held out hope while doing nothing: he indicated to O’Reilly and Waterford Wedgwood executives that he was sympathetic to their plight and willing to do everything he could … if only he could, that he’d be back to them later, once his people had looked at a few more things. But Waterford Wedgwood needed a decision now.
Independent News & Media was still acquiring assets as late as February 2008, using its equity to do so, with the elevated share price making it a seemingly sensible alternative to more borrowing if acquisitions really were a good idea. The US firm Clear Channel, with which O’Reilly had a long and good association, took a 4.7% stake in INM in return for INM buying the 50% stake in African outdoor advertiser Clear Channel Independent that it did not already own. The deal was valued at €87 million. Furthmore, INM also bought The Sligo Champion, a small provincial newspaper, at a jaw-dropping price of over €20 million, this time borrowed, to add to its portfolio of Irish regional titles.
There were also more share buybacks, with INM spending €28 million buying 1% of its own shares. O’Reilly was also in the market to buy shares personally. He bought €20 million worth in March 2008, another €8 million worth in April and another €10 million worth in June, at an average price of over €2 per share, in an effort to copper-fasten his position. He borrowed much of the money. It increased his shareholding to 27.2% of the overall total. But by this stage O’Brien was now up to 22.15% of INM. While O’Reilly did not anticipate the fall in the INM share price that was to come later in the year, he knew that he was already in deep trouble at Waterford Wedgwood. He was also sufficiently clued in to global economic events to discern the significance of the Bear Stearns collapse in March 2008 for the further provision of bank finance and for the valuation of assets. Yet he still borrowed and bought.
He had decided to take the fight to O’Brien publicly. Private investigators were hired to get ammunition and – in a move that was to prove grist to the mill of O’Brien’s theory that journalists in INM were acting as pawns for their masters – some journalists were encouraged to dig for information about O’Brien’s finances, something that had not been asked of them before. Somewhat to the surprise of some INM executives, it was The Irish Times and other publications that were more successful in raising questions about O’Brien. The INM management suspected some of their own journalists were reluctant to dig in case O’Brien eventually ended up winning control, and they would then suffer the consequences.
The first metaphorical punch to be thrown publicly was swung in late March 2008, when O’Reilly decided to label O’Brien as a ‘dissident shareholder’. He instructed Gavin to make a statement to that effect to the stock market and to hold a press conference at the Shelbourne Hotel in Dublin. Gavin put himself in the firing line when he accused O’Brien of trying to damage the company’s reputation with a campaign of ‘lies and innuendo’ and of not acting in the best interests of shareholders. At the press conference, Gavin let fly:
Having taken appropriate advice, the board of INM believes that Mr O’Brien’s comments and actions regarding INM, its board, its management, strategy and its governance, are designed to destabilise the company and run counter to the principles of a fair and orderly market for INM shareholders. This company has nothing to back down from. We’ve just delivered record results. We have a very, very clear vision for the future. We have supported shareholders. This is a battle, this is a war of Mr O’Brien’s choosing, not of ours. As far as we’re concerned we’re going to continue to run our business to the best of our ability, evidenced by the results that we’ve just produced … O’Brien has sat there, he’s run around the place throwing hand grenades, and hid behind his PR people. And the press has been uncritical in its questioning of Mr O’Brien … He is free to buy shares, as indeed is any institution or individual. What he is not free to do is to continue to issue misleading, defamatory information.
Gavin also accused O’Brien of having a ‘persecution complex’ over coverage in INM titles. ‘In the light of this, we believe it is reasonable to question Mr O’Brien’s emotive reaction to the legitimate news coverage.’
As Gavin took questions from the floor, a page titled ‘Some Questions for Denis O’Brien’ was circulated to journalists. It included 18 questions in all, some of which questioned his management credentials and the losses incurred by Communicorp, his radio group. Another asked whether O’Brien’s Caribbean mobile phone company, Digicel, was worth about US$1 billion less than its outstanding debt.
O’Reilly’s adviser, Rory Godson, recalled the decision to label O’Brien as a ‘dissident shareholder’ as ‘catastrophic’, and several directors who spoke for this book on condition of anonymity agreed. ‘It gave O’Brien the status, to some, as the necessary anti-O’Reilly person. The term had no legal standing here. I was told that this was the way things were done in the United States and maybe it was, but it wasn’t going to fly here.’
O’Reilly affected a degree of indifference to O’Brien’s assaults, at least publicly. ‘You have to realise that I was for twenty-five years the president of the HJ Heinz company and in America the whole issue of dissident shareholders is a constant theme in almost every board that I’ve ever been on. And I’ve been on the board of Mobil Oil and Banker’s Trust and The Washington Post and the HJ Heinz company, so I am somewhat a veteran of the wars in terms of dissident shareholders.’
The reality was that he was shocked. ‘The O’Brien assault was staggering to him. He just couldn’t understand it. He was utterly perplexed,’ said one of his advisers.
Gavin was determined to defend his father’s reputation – and his own. ‘It’s an easy target to look at myself and my two brothers,’ he said. ‘I find it slightly outrageous that this shareholder would seek to impugn my father, who has essentially created this company. He took a small company back in 1973 and turned it into one of the first-class media companies in the world. There isn’t anything, as far as I’m concerned, in Mr O’Brien’s history of running media that makes me feel he’s well qualified to make these comments.’
O’Brien countered that INM’s statement was a ‘highly personal and unwarranted attack. I have always been, and remain, committed to investing for long-term value for all shareholders and look forward to seeing signs of a similar approach from the board of directors.’
O’Reilly continued to leave interaction with the government on media issues to Gavin and Crowley. He was pleased when, in April, Martin, having previously approved the Today FM acquisition by Communicorp, established an inquiry into media ownership rules. The Government said this followed a call from the Competition Authority, which encountered difficulty when examining the Today FM deal because it did not have ‘the expertise’ to decide plurality in the media. O’Reilly hoped for an outcome that would block O’Brien from buying any further shares in INM, or even demand that he sell some if he was going to leave his radio empire untouched. At the very least he felt it bought him time.
Time was not something Waterford Wedgwood had, at this stage. By April 2008, with the government still procrastinating, John Foley, CEO at Waterford Crystal, was given the job of applying the pressure publicly to get a decision. He claimed that any government assistance would be akin to the public bailouts of Northern Rock in Britain, Bear Stearns in the USA and the rescue in the 1980s of Insurance Corporation of Ireland. It was put to Foley by The Irish Times that all of his examples involved systemic risk in the financial markets and were not remotely similar to Waterford Wedgwood’s experience. He responded: ‘I argue that this is such an iconic brand and company and so part of the Irish psyche, not only in Ireland but internationally, that it is every bit as important to us as those other situations in other countries.’ Some of his colleagues worried that he had gone down the wrong track in the examples he had selected.
Redmond O’Donoghue felt that the public servants were ‘very timid’ in their response to the request from Waterford Wedgwood for aid: ‘The politicians were better at seeing the bigger picture. The public servants kept banging on about State aid and “national champions” not being allowed by the EU. But at the time we were reading about the German government protecting Opel by putting in €6 billion in loans and underwriting guarantees. In France, PSA Renault got €8.5 billion in supports. In the United States, General Motors and Chrysler got US$62.5 billion and US$13.5 billion respectively, and look at General Motors today.’
The pressure didn’t work. In May, soon after Ahern had been replaced as Taoiseach by Cowen and Brian Lenihan had been promoted to become Minister for Finance, the government formally rejected the loan guarantee proposal. Martin’s replacement as Minister for Enterprise, Trade and Employment, Mary Coughlan, said that it was ‘not possible to devise an approach’ that would be acceptable to both the Government and the company. ‘It would have allowed us to buy time,’ said O’Donoghue. ‘It wasn’t just the money, it was also about the signal that it would have sent to the market, the message that the Irish government was four-square behind us.’
In both the O’Reilly and the O’Brien camps the belief was that, notwithstanding the controversy surrounding his resignation, O’Reilly was interested in appointing Ahern to the board of INM once a suitable period of time had elapsed after his stepping down as Taoiseach. Former taoisigh, such as Jack Lynch and Garret FitzGerald, and former Minister for Finance Ray MacSharry had taken corporate directorships on leaving politics and while INM did not have a track record of appointing former Irish ministers or taoisigh, O’Reilly had appointed many prominent foreign former politicians, including prime ministers, in recent years. Given their relationship, Ahern was an obvious choice, notwithstanding the inevitable controversy it would have caused. In the summer of 2008 that might have been possible, in spite of O’Reilly’s need to reduce the bloated size of his board to fend off criticism from O’Brien. However, the swift collapse of the INM share price and O’Reilly’s loss of control were to put paid to the idea.
Ahern’s departure from politics threatened to derail O’Reilly’s key plan for Northern Ireland. Tax was an issue that greatly occupied O’Reilly’s time and intellect, although his critics claimed it was always with a view to minimising his own payments. For states and their governments he was a big believer in the ‘less creates more’ principle, and even with his own personal financial problems increasing he didn’t lose sight of his political ambition for Northern Ireland. In May 2008, O’Reilly spoke at a special international investment conference in Belfast, at the Northern Assembly parliament buildings at Stormont, which was attended by British Prime Minister Gordon Brown and the new Taoiseach Brian Cowen. He used the occasion to promote his economic idea for Northern Ireland, which he had floated previously but to no avail: that it receive a special deal within the UK and the provision of a low corporation tax rate similar to that which applied in the Republic of Ireland, as part of the transfer of some fiscal autonomy. It was a notion to which Brown was strongly opposed. O’Reilly argued that Northern Ireland had to be ‘allowed to open wide the economic throttle’ if it was to make up the lost ground and missed opportunities of the Troubles: ‘We must achieve quickly a situation where new investors are delighted not only with their pre-tax profits but with their after-tax profits as well.’
The event was accompanied by the publication of photographs in various media. The photographs were remarkable in one respect: alongside a smiling O’Reilly was a beaming Martin McGuinness, Sinn Féin’s Deputy First Minister, along with the Democratic Unionist Party’s Ian Paisley and the Mayor of New York Michael Bloomberg. Given the antipathy between O’Reilly/INM and Sinn Féin/IRA, it was a landmark occasion and photograph. Clearly others beyond Rabbitte had convinced O’Reilly that McGuinness was somebody worth doing business with; by the same token, Sinn Féin, north of the border at least, had long become convinced of the merits of working with the Ireland Funds, and therefore McGuinness was prepared to be seen in O’Reilly’s company.
There was an implicit endorsement, too, of Sinn Féin and McGuinness in O’Reilly’s speech to the conference, when he described the executive as a ‘very strong ministerial team’. He claimed that ‘investors will be impressed by that and by the way they are so sharply focused on creating an increasingly vibrant economy’. In keeping with the themes he had promoted throughout his career, he described Northern Ireland as a ‘very competitive location where companies can make good profits’.
It had escaped the attention of few of his newspaper employees in the south that the north was becoming home to more INM investment, as part of the cost reduction drive. In 2007 INM had opened a new Stg£20 million, 60,000 sq ft printing press plant in Newry, just on the northern side of the border. At the 2008 conference O’Reilly announced an expansion of that plant, involving another Stg£7 million in capital expenditure.
Also in May, INM released its annual report for 2007, in preparation for an AGM in London in June 2008 that was likely to see O’Brien fire another salvo across the bows. O’Reilly used his CEO’s statement to make claims that were designed to burnish and bolster his personal stewardship of INM. ‘We make no apologies for saying we are the right company with the right products and we intend to work these products for the benefit of each and every one of our shareholders,’ he declared. In growing earnings per share, ‘we have comfortably outperformed our global media peer group’. He cited the 2007 Daily Mail and General Trust (DMGT) annual report, which described INM as the best performing media organisation as measured by total shareholder return in the period 2002–7. ‘I think all of this will suffice to convince you that you are investors in one of the best-directed and most successful media companies in the world.’
He boasted of consistent growth in revenue, earnings and control of operating expense. ‘Over the last five years the group’s core publishing division has been refocused and re-engineered as part of a transition to become the industry’s leading low cost operator.’ Independent News & Media increased both advertising and circulation revenues during 2007 and ‘there is almost no media company in the world – certainly not one that operates on such a broad scale as INM – that can make a claim of that nature.’ He cited geographic spread as a protection against economic downturn. ‘It is the view of the board and management that significant opportunity still exists outside of the developed markets of Europe, North America and Asia and INM is uniquely equipped to exploit these. I believe truly innovative companies are those that intelligently identify new markets around the world, develop new workflows and processes to cut inefficiencies, leverage strong brands and assets for both global and local expansion, and that identify market segments poised for substantial growth.’
Everything in the report seemed to be written with O’Brien in mind, but without mentioning him. ‘We have a frugal management structure which combines both independence and collegiality in equal measure,’ he wrote. He emphasised his own work ethic. ‘During the past three months I visited almost every single operation of our company, ranging from Yandina in Queensland to India, Indonesia, South Africa, Germany, Britain, Northern Ireland and the Republic of Ireland.’ He defended the non-executive directors from criticism. ‘Representing a very broad church … they are individuals of intellect, insight and experience. Their sound judgement and direction to the executive directors is immense and is of significant benefit to the company and its shareholders.’
There were some little digs seemingly aimed at O’Brien. ‘As a board we share important objectives and understandings about the nature of and structure of society and the responsibility, particularly of the press, in regard to objectivity and non-interference in the editorial process,’ he declared. He also tried to emphasise that INM was a giant and, by implication, that O’Brien’s Communicorp was a minnow by making a rare reference to INM’s broadcasting assets: ‘Our radio stations, with almost 6 million listeners, exceed the entire audience of RTÉ and all private stations in Ireland.’
None of this got the attention that O’Reilly craved. While O’Reilly placed enormous emphasis on his statements in annual reports, believing that investors would devour and believe whatever he wrote, the media rarely reported such material, believing it to be merely propaganda and not newsworthy.
There was news in the weeks running up to the AGM that gave him both hope and fear. At the end of May the Broadcasting Commission of Ireland (BCI), the regulator for the radio sector, announced that it would review the extent of O’Brien’s radio assets. The BCI’s legal remit was to promote the plurality of media ownership and to guard against any person having ‘control of, or substantial interests in, an undue amount of the communications media’. However, just because the BCI had the power to block media mergers on the basis of cross-media ownership did not mean that it would take any action. And the BCI action was not motivated by any feeling that it needed to do something in the public interest: the review was triggered automatically by O’Brien stepping over the 25% ownership threshold in INM. There was a further bit of bad news in that, by having more than 25%, O’Brien could now block any proposals from the INM board to change its internal rules or the number of shares in issue. That share ownership issue was significant because O’Reilly and son Gavin made their last additional purchase of shares just before the AGM. Together with other directors, they now owned 29.49% of the group.
O’Reilly and his board waited for the inevitable O’Brien assault at the AGM at the Park Lane Hotel in London in June. O’Brien had a new report to support him, from Glass Lewis, a voting advisory service for American investment funds. It argued that the board was too large, at 20 people, had too few independent directors and an audit committee too closely affiliated with management, especially as Stg£333,000 had been paid to directors for consultancy services over and above standard non-executive fees. Another voting adviser, ISS, recommended opposing the re-election of three non-executive directors.
‘This should be a matter of grave concern,’ O’Brien said in a statement. ‘It is in the interests of all shareholders that our board carries out its duties and responsibilities in a totally objective and impartial manner.’ He called for the resignation of O’Reilly as CEO, for the board to be slimmed down and demanded the sale of the London Independent titles. He also condemned what he saw as the lack of a digital strategy.
Independent News & Media described his report as a ‘malicious and wholly inaccurate assessment’. It commissioned its own governance report, carried out by Harvard Business School professor Jay Lorsch, which gave it a clean bill of health. ‘The dissident shareholder can’t beat something with nothing and, frankly, that’s exactly what he’s offered shareholders,’ Gavin said. ‘He has offered no alternative vision, strategic or otherwise – no directors, no bid, nothing. All he’s done is pursue a Don Quixote-like campaign in an area where he has no experience and, to judge from his less-than-stellar Communicorp results, no expertise either … The Internet is a wonderful place if you know what you are looking for, but we run the risk that running headlong into digital will turn our dollars into pennies.’
O’Reilly was unhappy that O’Brien’s criticisms got such an airing in the rest of the British media, which turned up in force to witness a rival’s discomfort, but having been forewarned, he and his colleagues had at least turned up forearmed. He was somewhat fortunate, too, that he would get some publicity from a function at the Cannes Lions international festival later than month, which he would attend to pick up a ‘Media Person of the Year’ award. He was happy to see the advertising industry bible Campaign write in glowing terms about him, describing his most prodigious quality as being ‘charm. This alone marks him out among media barons, so many of whom reveal themselves, despite their best intentions, as masters of all that is cantankerous and misanthropic. Those who have come under his spell say O’Reilly is easily the world’s most charismatic media mogul.’ He might have been less impressed that the headline compared his longevity to that of Silvio Berlusconi and his Italian media interests.
O’Reilly was into whatever good press he could find. He invited Martha Stewart, still immensely popular despite her conviction for tax fraud, to his Castlemartin home and she wrote about it on themarthablog.com in July 2008. She wrote gushingly about the house, gardens and the hospitality, enjoying ‘spring lamb chops and fresh garden peas’ before a dessert of ‘sour lemon meringue tart’ in the company of Brian Mulroney and his wife, Mila, as well as the O’Reillys. There were photographs of the grounds but none of Waterford or Wedgwood products, which was presumably the point of bringing her there other than just flattering his ego.
All the good press in the world couldn’t change facts, though, and the fact was that the value of INM shares slid dramatically from August 2008. It was like watching a car crash in slow motion. Down they sailed towards €2 and then, once through that, to €1 each. Then, when that floor was breached, they continued all the way down to as low as 9 cent each – giving one of the giants of Irish corporate life a value of just €80 million. The consequences for the wealth of both O’Reilly and O’Brien were catastrophic. Both owned shares worth as little as €20 million at that low point – had they been able to find someone to buy them. It was more expensive in cash terms for O’Brien, as he had bought the shares recently and at much higher prices than O’Reilly would have paid for the bulk of his many years earlier. Although never confirmed, O’Brien may have spent up to €500 million on his accumulation of INM stock, implying huge losses, and much of the money had been borrowed from Barclays Bank in the UK. But O’Reilly had spent tens of millions of his own money too, much of it borrowed, and the company’s decision to spend €130 million, also borrowed, buying its own shares now looked even worse than it had at the time.
What caused this slump in the share price – and enabled the bankers to force radical change upon the company? The impact of a quickly enveloping recession in Ireland was obvious for both advertising and circulation revenues, and the other economies in which INM was active also suffered badly, and quickly. The banking world was changing quickly, too, as liquidity issues meant that banks were suddenly reluctant to provide or refresh the loans as they had so readily done in previous years. This was even before the crisis for the banks that brought about the Irish government’s introduction of a guarantee in late September 2008 to save some of the Irish banks from collapse. It also predated the realisation that many of the property loans given by the banks would not be repaid and that, without the injection of tens of billions in fresh capital by the State, insolvency would result.
The banks were far quicker to move against INM than against any of their property-reliant clients. The first indication of the new powers of lenders to INM came in August 2008, when the group announced that it had ‘succeeded’ in securing a new €105 million bank facility to replace a bond that had matured in December of that year. But success was relative because the group of lending banks, led by AIB, demanded security by way of a charge over INM’s main Irish newspaper titles, specifically the Irish Independent, Sunday Independent and Evening Herald. It provoked memories of what had happened to the Irish Press titles more than a decade earlier, when a profitable business with established and successful titles was dragged into the mire by rows between shareholders and mounting debts. As lead banker in providing the loan facility, AIB was also granted a charge over The Independent newspaper title in London and the controlling stake in The Sunday Tribune. This requirement to potentially give effective control over the central assets showed the fear the banks now harboured about INM’s ability to repay its debts. Suddenly, INM needed to raise money, and fast.
There was little fat to be cut from the business (although Irish employees did take pay cuts late in 2008) because INM had been ruthless previously in slashing the costs of producing its titles, outsourcing advertising sales and sub-editing of its Irish titles to cheaper service providers. While the Irish newspapers operated at profit margins that were the envy of the global industry, the company had not used its profits to pay down debt sufficiently: too much of the money went towards feeding the voracious appetite of the shareholders for cash through dividends. The company looked quietly to sell assets overseas, but could find no buyers.
There were about to be two dramatic developments at INM that would emphasise just how weakened O’Reilly’s position had become. In November, O’Reilly took the extraordinary decision to consider the sale of the INM shareholding in APN, 20 years after the family and Irish company had taken effective control of it. Independent News & Media claimed that it had been in receipt of ‘a number of expressions of interest’ in buying its shares, although not giving any details as to the identity of likely buyers. It suggested that a sale would reduce net debt on its books from €1.4 billion to less than €600 million and that the transaction would be ‘earnings neutral’ in 2009 as the consequent reduction in its interest bill, which had exceeded €93 million in 2007, would offset the loss of profits from APN.
At the time APN was valued at €1.18 billion, meaning that INM’s interest was worth €241.62 million, but INM said that was not reflected adequately in its own share price. Many were confused as to who the likely buyers would be, especially when Fairfax – for so long touted as a possible candidate for O’Reilly’s expansion plans – publicly denied any interest in buying into APN or any assets, such as the New Zealand Herald, that it might offer for sale. Fairfax highlighted a problem any potential buyer would have: low share prices meant an equity-funded purchase would be expensive, and banks were not looking to lend money for acquisitions either. Realising that his own investment might not survive if he didn’t act to protect it, O’Brien decided to initiate peace talks with the O’Reilly camp.
In early November 2008 O’Brien wrote to INM’s chairman, Brian Hillery. In return, the one-time so-called dissident shareholder was quickly offered a meeting at Citywest not with his foe but with his one-time social friend Gavin O’Reilly. O’Brien, his adviser Paul Connolly and stock market strategist David Sykes met with Gavin, COO Donal Buggy and Vincent Crowley. It was such a cordial meeting that, significantly, the visitors were given a tour of the plant, news of which quickly found its way into non-INM-owned newspapers. The INM executives outlined to O’Brien and his people what the company would do to stave off ruin. ‘Gavin was the subject of a charm offensive by Denis and he became convinced that he could work with him. He told his father that too, but convincing him was a far more difficult task. His father was very sceptical,’ said one INM executive on condition of anonymity.
Gavin’s interaction with O’Brien followed a very difficult meeting he and his brothers had with their father. Gavin had become acutely aware of the financial dangers being faced by INM: ‘Welcome to Waterford Wedgwood Mark 2,’ he drawled ruefully to one adviser as the financial noose on the company tightened. The realisation was dawning that rolling over INM’s debts – the repayment of loans as they fell due with new loans of the same size – would now be much harder than had been anticipated. Gavin spoke with his brothers – both directors of INM, albeit in part-time capacities – and the three sons came to a difficult decision: they would confront their father over the dramatic deterioration in his wealth and his approach to dealing with it. They were worried that he would waste what he had left on a further folly at Waterford Wedgwood and would be forced to bow at INM to O’Brien’s greater financial resources. They wanted him to compromise. This meant a trip to Deauville in November 2008, where they presented a united front in one of the most difficult meetings imaginable with their father.
O’Reilly had always had the attitude of ‘I made the money, it’s mine and I’ll decide what to do with it’, but although he was slow to realise it, that didn’t apply anymore. Cameron had never been afraid to challenge his father, but Gavin and Tony jnr had always been somewhat more reluctant. Their father might listen, but he was autocratic and had never been shy about saying that. He was always tougher with his sons than he was with other management. That the three travelled together was hugely significant. But the fact was that the sons’ inheritance was at stake and, in Gavin and Tony jnr’s cases, their continued livelihoods too. Both men had broken first marriages and the costs that arose from that, as well as being in new relationships. Their message to their father was clear: there should be no more money for Waterford Wedgwood, and a compromise with O’Brien at INM was the only way to save the company. O’Reilly listened, but he made no promises to his sons.
As a 25% shareholder, O’Brien had enormous legal and effective power. The banks, in particular, understood this and sought to make O’Reilly aware that O’Brien could not be ignored. The fall in the stock market value of INM to below €200 million meant that, under company law, any attempt to sell assets for more than a combined amount of €100 million would require approval at an EGM. The banks could not afford O’Brien using his shares to block any initiative O’Reilly might have sought to undertake without him, such as the APN sale.
The revelations that APN was for sale and that the O’Reilly and O’Brien camps were talking to each other was seen as a sign that they had realised they had to work together to save INM. This gave the share price a temporary boost. The company also conceded publicly that it would have to cut operating costs at its loss-making Independent and Independent on Sunday titles in London. In addition to a previous cost-saving deal it had done with Associated Newspapers, the publishers of the Daily Mail, it said it would look to introduce so-called ‘shared-services operations’ with rival British national newspaper groups that would ‘create more efficient editorial work flows’ while somehow preserving the titles’ editorial ethos. Few people in the newspaper business could see how that would work, but it was a sign of O’Reilly’s emotional attachment to these particular titles that he would look to do all of these things, if he could, just to keep ownership of the papers. However, Gavin, with O’Brien encouraging him, was sounding out potential buyers.
O’Reilly found it hard to deal not just with his growing financial misfortunes but with his inability to control events. ‘He always had to win everything, always had to be right and he simply wasn’t used to things not going his way,’ said his adviser, Rory Godson. He was now into his seventies and while his remarkable intellect was still razor sharp and he retained much of the high level of energy that had made him so formidable, he had become somewhat set in his ways, certain of his interpretations, even when others disagreed. As a keen military historian O’Reilly was well aware of the dangers of having to fight battles on too many fronts with limited resources. As events at INM overwhelmed him, he had to face an equally serious situation at Waterford Wedgwood.
O’Reilly made one last effort to raise new equity for Waterford Wedgwood in September 2008. He sought to raise €153.7 million, but found it almost impossible to get potential investors interested, even though the planned share issue was backed by ‘irrevocable undertakings’ from O’Reilly and Goulandris to stump up €60 million. Another €15 million was coming from Lazard, the fund that had invested €50 million the previous December. Other directors were told they too had to contribute, painful though it was for them with their more limited resources, because failure of a director to get involved would be interpreted as a loss of confidence in the company from within.
It didn’t work. The company got just short of €80 million in new funds and had to admit that it would not be able to raise the remainder of the money required at the price suggested. It would try to raise the balance on different terms ‘and which, significantly, may encompass a comprehensive financial restructuring’. All of its comments to the stock exchange were carefully worded because of legal concerns. The directors had ‘reason to believe that their senior lenders will continue to support the company whilst discussions with potential new investors continue’.
Waterford Wedgwood said the money would be used to implement the business plan that David Sculley, O’Reilly’s old Heinz colleague, had been working on since the previous April when he had taken over from Peter Cameron as CEO. The promise was that the plan ‘will remove complexity from the business, targeting substantial annualised cost savings as well as a significant reduction in monies tied up in working capital’. It promised that debts would be reduced and that, crucially, it ‘should ensure we have the requisite working capital in place well ahead of the vital Christmas trading period’.
All sorts of promises were made in the latest effort to entice new investment. ‘The three-year cost reduction programme will go further than any plan before it with proposals to streamline all areas of the business … We must align our cost base to a position where we are not reliant on significant sales growth to achieve our goals.’
In retrospect, there may have been an opportunity at this stage to opt for the process known in the Irish legal system as examinership, as had happened at Chorus in 2003 without INM. An application to the High Court could have been made and, if secured, would have given the company between 60 and 90 days’ protection from having to repay its creditors. A ‘scheme of arrangement’ could then have been formulated, in which O’Reilly and Peter Goulandris would have used the money that was going into the futile rights issue as a new investment instead. The process would have allowed Waterford Wedgwood to write off a large chunk of its debts, albeit with the support of the creditors. O’Reilly could have organised all of this in advance – a so-called ‘pre-pack’ – which would have locked out the chances of somebody else coming in instead to own the business, subject to the agreement of the courts.
O’Reilly wouldn’t do it.
‘He always refused to countenance that,’ said O’Donoghue. ‘He believed it would be terribly wrong to see employees, pensioners and thousands of creditors going unpaid so that the business could be started again. He wouldn’t screw people. His honour demanded that he wouldn’t do that.’ Kevin McGoran, a director of Waterford Wedgwood since O’Reilly’s first investment in 1990, concurred that if the idea was mentioned, it was most certainly never discussed; it was simply not the right way to do things.
But if O’Reilly wouldn’t do it, then the pension fund trustees most certainly could have, and indeed should have taken action to appoint a receiver to the company much earlier, on the grounds that the deficit in the pension fund had become too large and was not being adequately funded by Waterford Wedgwood.
In October 2008 the company confirmed that its manufacturing at Waterford was to be further reduced, by another 280 people on top of the 490 announced the previous November, to concentrate on ‘a range of prestige hand-crafted products, its tourist trail and its gallery operations’. It said that ‘it remains committed to the retention of its intellectual property in Ireland’. Foley spoke of the company being ‘proud of its heritage’ and said that ‘the city of Waterford remains its home’ and that the retention of a high-value, hand-crafted crystal manufacturing presence in Waterford was ‘critical to the DNA of our brand’. It accompanied an admission, however, that ‘maintaining manufacturing operations in Ireland at their current level is not feasible’.
Waterford Wedgwood’s market value was now less than €50 million, but it had debts of more than €470 million. The dollar was weakening and an international recession that would certainly impact further on the purchase of luxury items was taking hold. The pension fund deficit had been reduced, but it still was just a couple of million euro short of €150 million. As O’Reilly had not ever considered the possibility that Waterford Wedgwood could go under, the realisation of the impact this would have on the company’s pensioners – particularly those in Ireland, where the same State-backed legal protections did not exist as in Britain – came late to him and horrified him. ‘He seriously considered gifting his shareholding in Waterford Wedgwood to the pension fund in an effort to put some value back into it,’ Godson said. It was too late, however, given that the shares were largely worthless.
Waterford Wedgwood’s bankers were becoming even more anxious. The existing covenants – or legal agreements relating to them – had been breached. The representatives from Bank of America and other banks had extended a number of deadlines and would do so again one more time, in November, for another 30 days on interest repayments. It warned that after the fourth such deferment, and in the absence of new equity, the full terms of the loans would be exercised and full repayment would become due from 2 January 2009. The amount of additional equity required, beyond a further €33 million that O’Reilly and Goulandris had scraped together and were prepared to invest, was a further €78 million. There was nobody who would put that in. Peter – the self-declared ‘very good brother-in-law’ – had regularly invested further money on the basis that it was the only chance he had of getting back some of his original money. Now he too was reaching the point of no more.
Within the Waterford Wedgwood board there was a feeling that they were deeply unfortunate with the timing of the company’s needs, as a global financial crisis took hold. ‘I truly believe that if you wanted to buy something for €10 million, say, and you had €9 million and wanted to borrow the other €1 million in late 2008, you just wouldn’t have been able to raise it, so paralysed was the banking system at that time,’ claimed O’Donoghue. While that was true, it was also the case that everybody outside of Waterford Wedgwood had run out of confidence in its ability to trade its way out of its crisis.
There were no assets that could be sold quickly enough by the company, O’Reilly had no more money left to give and his brother-in-law had decided that he had given enough. They could not even guarantee repayments on loans. O’Reilly would have to return to the Irish government, but even this legendary salesman had little he could offer to get what he wanted and needed. He met with Minister for Finance Brian Lenihan in his Fitzwilliam Square home, where much of the conversation was about the crisis in which the country found itself. They had a connection as Belvedere College alumni and O’Reilly was readily engaged by Lenihan’s intellect and somewhat eccentric manner, as well as by his willingness to listen and debate ideas. Lenihan was as interested in O’Reilly’s views in the banking and economic crisis he was facing as Minister as he was in hearing about O’Reilly’s troubles at Waterford Wedgwood. ‘I quite like meeting rich men,’ Lenihan told a friend with a smile when he returned to the Department of Finance, ‘they are very interesting to listen to, but that doesn’t mean you have to do anything about what they say.’
On 17 November the company issued a statement that it would be discontinuing its listing on the London Stock Exchange, keeping one only in Dublin. It admitted a further slowdown in sales, by 19%, in October compared to the same month a year earlier, blaming the world economic environment, an acceleration of the trend of recent months. In a clear example of straw-clutching, the statement claimed that Waterford Wedgwood was ‘generally outperforming its competition’ and was retaining or increasing share in its key markets. More prose about the standing of the brands was included in the statement.
The company made a prediction for 2008 sales of €615 million, down from €672 million in 2007. It said the new management was giving ‘stringent’ priority to cash generation over earnings, making a big effort to reduce inventory levels. It admitted, however, that the group was heading for another €200 million loss for the year, when €80 million of costs involved in the latest restructuring plan were included, to add to the previous year’s €241.6 million loss. David Sculley’s promises – to improve gross margins, reduce indirect costs and restrict the product range – were all designed to boost cash-flow.
It was not the last trading statement from the company as a PLC. That came in early December, when figures for the six months to end October 2008 revealed an operating loss of €29 million. Sculley said that ‘despite immense challenges, there are a lot of things that are right about this business and the group has a future that is worth fighting for. We are currently in negotiations with a number of interested institutional investors about a possible investment in the company on terms which, if consummated, would be different to those described in the prospectus and which, more significantly, are likely to require as a pre-condition a comprehensive financial restructuring.’ In other words, the delay in getting money meant that Waterford Wedgwood now needed more than it had originally sought, more than it had been unable to raise previously.
It was true, however, that a potential partner was in serious negotiations. ‘We continue to make good progress with potential investors and currently enjoy the support of our senior lenders,’ Sculley claimed. He made it known publicly that Waterford Wedgwood had managed to secure a further 30-day deferment on interest repayment on loans. But 2 January 2009 was the deadline for the provision of new funds and if that was not met, then the banks would demand immediate repayment of all loans. Failure to meet the repayments would result in the appointment of a receiver.
O’Reilly went back to government in a last throw of the dice, but the then Minister for Energy and Communications, Eamon Ryan, does not recall any new formal or specific proposals for Waterford Wedgwood being brought forward for consideration at Cabinet, even if there was plenty of discussion about what could and should be done. One idea being suggested, but which didn’t reach Cabinet, was that the government would buy the property hosting the visitor centre and lease it back to Waterford Crystal.
‘There was no sense of Fianna Fáil feeling that it owed anything to O’Reilly,’ Ryan said. ‘The government didn’t fear negative media comment much either. By that stage it [the government] knew it was in so much trouble that what the papers wrote hardly counted.’
Ryan noted that ‘the timing of what O’Reilly wanted was all wrong … Martin Cullen pushed hard, but the government had just guaranteed the banks and had introduced an emergency Budget. It couldn’t be seen to be bailing out a business that had little chance of success, especially when it had such wealthy backers. Brian Lenihan, in particular, was strong on not providing anything.’ Lenihan’s position was never disclosed to O’Reilly and his allies, who had hoped that the old Belvedere school connection would stand to them. Years later, the Waterford directors still believed that Lenihan was the minister most favourably disposed towards helping the company, second only to Cullen and matched by Martin; they had misjudged Lenihan’s friendly, can-do attitude for a real willingness to deliver.
‘Ultimately, we wanted to save Waterford Crystal,’ said Micheál Martin. ‘It would have suited us. We had put enormous investment into Waterford as a city and county in previous years and got no benefit out of it. All of the goodwill was lost because we were in power when Waterford Crystal closed. But we couldn’t do it.’
The government assisted O’Reilly in one last effort. The Sunday after Christmas Day 2008, O’Reilly visited Taoiseach Brian Cowen at Government Buildings to enlist his help with one last appeal to Bank of America to continue rolling over its loans to Waterford Wedgwood. Cowen was reluctant, given his own negative assessment of the situation, but was persuaded by O’Reilly’s desperation and got on the phone to the USA. He was met with a polite response. Put it in writing, he was told. It was a brush-off, and Cowen suspected as much even if O’Reilly, displaying almost naïve optimism, told him that this was a breakthrough. Cowen made the written request anyway, one that would be put to the consortium of banks when they met on 3 January. As Cowen suspected, it would be ignored.