Bank of China, one of the four biggest state-owned commercial banks in China, has made an offer of more than €150 million to acquire stockbroker Goodbody Stockbrokers – but rival bidders Davy and Irish Life remain firmly in the running.

As the race to acquire Goodbody nears preferred bidder stage, The Currency understands that Davy and Irish Life value the 142-year old firm at between €140 million and €150 million.

Fexco, the Kerry-based financial services firm founded by Brian McCarthy,  owns 51 per cent of Goodbody, with the remaining 49 per cent owned by Goodbody senior management and staff.

Davy is not proposing an all-cash offer. Instead, it is offering Fexco a chance to retain a 20 per cent holding in the new combined entity. Davy is predicting that a combined business would offer substantial synergies between both firms, and build a business capable of paying significant dividends to shareholders.

By going with Ireland’s biggest stockbroker, it argues Fexco will do better in the medium to long term.

The Currency also understands that Davy deputy chairman Kyran McLaughlin, who stepped down as head of capital markets last year, initiated talks directly with Fexco in late Spring or early summer 2019 before there was any formal process.

This approach ultimately led to a formal process being initiated. Goodbody management, who retain a substantial but not controlling stake in the stockbroker, are not believed to be enthusiastic about the prospect of being taken over by their traditional rival.

Among the significant individual shareholders in Goodbody are Stephen Donovan, co-head of investment banking, capital markets; Brian O’Kelly, co-head of investment banking, corporate advisory; and Roy Barrett, Goodbody chief executive.

Bank of China’s big balance sheet

Bank of China has the biggest balance sheet and its offer is attractive on not just cash terms.

Bank of China has put considerable resources into the proposed Goodbody acquisition, with a significant team on the ground combing through its data room. The bank was also one of the funders of a previous bid for the business by a different Chinese consortium, led by state-backed Zhong Ze Culture Investment Holdings. As such, it already knows a lot about the business.

This previous Chinese deal fell down-after 18 months of talks with Goodbody saying in a January 2019 statement: “Both companies have concluded that the rationale for the original transaction is no longer applicable due to a proposed change in the make-up of the shareholder structure made by the acquiring group.”

Bank of China is the most globalised of Chinese banks with operations in 57 countries. It plans to use Goodbody as a European platform which would be an attractive proposition to the brokers’ existing team.

The fact, however, that a previous Chinese consortium failed to close the acquisition of Goodbody could count against the new bid, which may explain why the bank is putting in so much effort to acquire what is a relatively small business for it. A&L Goodbody is believed to be advising Bank of China.

While Irish Life remains an outside bet in the race, its bid could have considerable merit. Irish Life is owned by Canadian financial services giant Great-West Lifeco, which has interests in North America, Europe and Asia.

Irish Life has appointed Tom Godfrey, chief executive of IBI corporate finance, to advise it along with McCann FitzGerald.

From a competition and regulatory perspective, the Irish Life bid has the least obstacles to a deal closing.

Irish Life and its owner are established with the Central Bank of Ireland and there is not that much overlap with Goodbody’s business.

Goodbody management and staff are unlikely to oppose Irish Life as an acquirer. Fexco would almost certainly end its involvement with Goodbody if this deal went through.

A combined entity would control over 50 per cent of many aspects of the Irish private wealth management market.

A Davy acquisition of Goodbody would require more rigorous competition approval. Both companies are privately held but a combined entity would control over 50 per cent of many aspects of the Irish private wealth management market.

In global terms though , even combined, the two firms are minnows. While it might take longer, a Davy acquisition of Goodbody is unlikely to be blocked by either regulators or competition watchdogs at a time when consolidation is occurring in the financial services industry.

Brian McKiernan, chief executive of Davy, openly told staff in an email when news of its interest in Goodbody first emerged that it wanted to be a consolidator in his sector. “Davy has the appetite and capacity to continue growing this business both organically and through acquisition,” he said.

Fexco bought 75 per cent of Goodbody eight years ago for just €24 million. Under an incentive scheme, Goodbody management and staff later doubled their combined holding to 49 per cent. Goodbody employs 300 people in Dublin, London, Cork, Galway and Kerry. Davy employs 700 people while Irish Life employs over 2,000.

No pressure to sell

Bank of China, meanwhile, employs more than 300,000 people.

Fexco has more than recovered its investment already, so financially it is not under huge pressure to sell. It has, however, committed substantial time to the first aborted sale and is now months into a second process. If no deal occurs again, the business will be seen in the market as still on the block, creating uncertainty. 

Fexco executive chairman Brian McCarthy originally came to Killorglin in Co Kerry in 1974 as assistant manager with the town’s AIB branch before creating Fexco, which processes over €14 billion in transactions annually. A sale to the Chinese or to Irish Life will conclude one of McCarthy’s best ever deals in a storied career.

However, a joint venture with Davy, uniting two Leinster and Munster powerhouses, could also prove attractive.

McCarthy will be conscious that he only controls 51 per cent of the business with the remainder held by Goodbody staff, who will have their own views about what is best for their future. A Davy acquisition would undoubtedly lead to significant turbulence.