Stories
Things have worked out okay for Davy’s shareholders. By selling off the business in three pieces, they have lined up a potential total payout of €565 million – almost double the number bandied about when Davy first put itself up for sale.
The biggest part of the three-part deal is the sale of Davy’s wealth management and capital markets business to Bank of Ireland for €440 million.
Separately, today, Davy announced the sale of Davy Global Fund Management (DGFM) to EQ-IQ, and of its 63 per cent stake in Rize ETF to AssetCo, the investment firm chaired by Martin Gilbert, who is also the chairman of Revolut. Rize is to go for €20 million and DGFM is reported to have sold for €80 million.
Taken together, the maximum Davy shareholders will get is €565 million. But that’s subject to a few caveats. €565 million is the enterprise value, and enterprise value is the value of a company’s shares plus the value of its debt, minus its cash. So the shareholders will get €565 million minus any debt the company owes.
Ian Kehoe reported back in March that Davy had €50 million in excess cash. So the starting assumption is that the buyers valued Davy’s equity and debt at €605 million.
After the DGFM and Rize deals complete, it’s been estimated Davy will have €125 million in excess cash. Bank of Ireland will “pay for” this excess cash. But buying cash with cash means nothing has really happened. From Bank of Ireland’s perspective, the number to focus on is the €440 million. That’s what Bank of Ireland is paying.
Then there’s a provision for €40 million of additional payments, payable from 2025. This is understood to be an incentive plan, which will be paid to Davy’s current employees (not its shareholders) subject to performance targets being hit.
De-risked
Clearly, Davy comes with some problems. Bank of Ireland is taking a risk in buying it.
One example is the Patrick Kearney / Davy 16 affair. Kearney may yet win compensation. On the back of the Davy 16 debacle, Davy hired Alvarez & Marsal, a consultancy, to forensically review all staff trading over the last seven years. The review is nearly complete, and Bank of Ireland has been given access to the almost-finished report.
Davy in disgrace: the full story
For four months, The Currency investigated the Davy 16 bond scandal, examining who knew what and when. Based on multiple sources, documents, courtroom filings and new information, this is the inside story.
Part 1 – the Belfast developer, the Davy bond dealer and the ex-Anglo banker
Part 2 – Heated exchanges, swearing and pressure points as a secret plan comes together
Part 3 – Denial, indifference and the ten days that shook Davy to its very core
How does Bank of Ireland protect itself in a transaction like this, where the assets it wants come with as yet unknown liabilities? The standard practice in M&A when there’s a known risk that hasn’t yet crystallised — like the Alvarez & Marsal report, or the Davy 16 case — is for the risk to stay with the sellers.
The bigger question is, how does the buyer ensure it isn’t stuck with the liability after the deal has completed and the risk crystallises? Davy is owned through the Isle of Man, which makes it hard for Bank of Ireland to claw back any money once it’s been handed over.
Bank of Ireland has protected itself by holding back 25 per cent of the purchase price, or €110 million. This money will be paid to Davy shareholders two years after the deal completes, “subject to Davy shareholders meeting a number of agreed criteria”. This is clever wording because it implies it’s based on Davy hitting performance targets. But more likely, it relates to Davy not being found liable for past wrongdoings — ie, “you get less if you did something bad”. The “you get more if you do something good” part of the deal is the €40 million incentive plan for Davy employees.
Davy shareholders won’t get the full amount until two years after the deal completes, ie sometime in 2024. This is an unusually long wait. It goes to show how risk-averse Bank of Ireland is — and how risky Davy is.
Another point is who gets to have conduct of the claim, ie who gets to decide exactly how big the liability is. Conduct over the claim is something Davy will have pushed for.
What Bank of Ireland wants
To understand why Bank of Ireland wants Davy, consider something called beta. Beta shows how volatile a stock is relative to the overall market. A stock that swings all over the place will have a high beta, a stock that’s super stable will have a low beta.
For stock market investors, beta is bad. It means the stock can’t be relied upon from one week to the next. Stock with a high beta are worth less than stocks with a low beta — even if their overall trajectory is the same.
Bank of Ireland has a high beta, especially compared to other European banks. The reason for that is that its earnings are very volatile. And the reason its earnings are volatile is because it makes all its money from lending. Money lending is a volatile business because it depends on prevailing interest rates in the eurozone economy. When interest rates in the eurozone drop, money lending gets less profitable, and banks whose business model depends on money lending drop by a lot.
Banks with a diversified business model — making money from money lending, fees, wealth management, trading — aren’t as susceptible to falling interest rates. European banks make, on average, 49 per cent of their profits outside of money lending. Bank of Ireland makes just 24 per cent.
All of which is to say, Bank of Ireland badly needs to diversify its income. It’ll benefit the bank in two ways: By simply increasing its income, and also by making it more stable. More stability means lower beta, which means a higher share price at every level of earnings.
It’s perfectly fine to think about a normal company in terms of earnings. But banks are different — with banks, it’s always earnings over equity. So the question isn’t just “what will this deal do to Bank of Ireland’s earnings?” It’s “what will it do to its earnings and its capital?” Bank of Ireland has guided that the deal will be funded through its existing capital resources, and that the hit to capital will be 80 basis points next year. Eamonn Hughes of Goodbody is confident the deal will be accretive to return on equity on day one.
Earlier this year, The Currency reported Davy’s wealth management business generated €15-16 million in earnings, and that the combined capital markets and equities business generated €10 million. It’s unclear how much of the €10 million in earnings derives from capital markets, the division Bank of Ireland is buying.
All in all, Bank of Ireland has paid a premium for Davy. €440 million is at the higher end of the bidding. And thanks to the red-hot market for wealth managers, it’s about sixty per cent more than initial estimates of Davy’s value from March. But Bank of Ireland has also de-risk this deal thoroughly. It’s holding back €110 million to cover scandal-related liabilities, and it’s holding the money back for an unusually long time.
The DGFM spin-off
Separately to the Bank of Ireland deal, Davy is selling Davy Global Fund Management (DGFM). DGFM is Davy’s fund management arm. It has €1.8 billion of assets under management, and €20 billion it supervises on behalf of others. It’s been reported Davy is getting €80 million for DGFM.
DGFM actively manages 24 funds. The funds cover stocks, bonds and cash; global assets, defensive assets, income, and ethical investing. The funds are an add-on to Davy’s wealth management business, which has €14 billion in assets under management. Davy steers some of its wealth management clients towards its in-house funds.
In an investigation into DGFM last year, I found 19 of DGFM's 24 funds failed to beat their benchmarks, including eight of its ten biggest funds. I also found the business is a richly profitable source of asset management fees.
IQ-EQ establishes Irish fund base with DGFM acquisition
In March, the first-ever employees of IQ-EQ Fund Services Ireland began to work for the company, based in the striking white stone-clad Rineanna House office block in Shannon Free Zone.
The company was registered one year earlier and, just before last Christmas, had received provisional authorisation to provide regulated fund services in Ireland. The Central Bank’s register shows that it is authorised to act as a business investment firm in the area of collective investment schemes.
Months earlier, its Luxembourg parent had also obtained a Central Bank authorisation to operate in Ireland as an alternative investment fund manager.
As soon as IQ-EQ Fund Services Ireland was up and running, an unexpected opportunity appeared on its radar. Davy was in meltdown following the imposition of a €4.1 million Central Bank fine over the Davy 16 bond trade. Within days, it was up for sale.
Four months on, IQ-EQ has now announced that it is acquiring Davy Global Fund Management (DGFM). From a standing start, the firm with offices in Shannon and Dublin – among multiple global locations – is suddenly becoming what it has termed “an established full-service funds business in Ireland with a proven track record and prominent market position”.
The Davy brand will disappear from the combined business, which will offer a suite of corporate administration, fund administration, fund management and portfolio management services under the IQ-EQ brand.
IQ-EQ was formed in 2018 when Luxembourg-based investor services firm SGG acquired First Names, a smaller player headquartered in Jersey. First Names had a foothold in Ireland, including the Dublin and Shannon offices, but its activity here was limited to the provision of corporate financial and managed services to European investors running subsidiaries in Ireland. It collected under €2 million in annual fees prior to the merger, and continued to do so in recent years.
With the acquisition of DGFM, IQ-EQ not only becomes a sizeable provider of the nuts and bolts required to run operate funds in this jurisdiction, but also an Irish-based asset manager in its own right. It will incorporate DGFM’s chief executive Tom Berrigan and its managing director Paul Giblin into its UK and Ireland senior team.
IQ-EQ has stated that the combined business will employ 110 people in Dublin and Shannon. This includes the 25 people it reported employing in its last accounts in 2019, new hires for the fund services unit this year and DGFM’s 68 existing Dublin staff. The future is less clear for DGFM’s 13-strong Luxembourg team, where IQ-EQ is already headquartered, and the lone fund managers employed by Davy in London and Chicago where IQ-EQ also has existing operations.
– Thomas Hubert
