Unlike the euphoria surrounding the proposed sale of State assets such as ICC and ACCBank, the sale of Irish Fertiliser Industries (IFI) will not provide any bonanza. Indeed, the Exchequer is facing a hefty write-off; it will be a case of the chickens finally coming home to roost. In 1987, the then Government side-stepped the problems at its biggest white elephant, Nitrigin Eireann Teoranta (NET). It did this by leaving the massive debts with NET, and hiving off NET's business into IFI, a joint venture between NET (51 per cent) and ICI (49 per cent). The agreement was designed to save the 500 plus jobs and avoid the Government having to write off £180 million of debt. But now the evil day is fast approaching.
A little over a week ago, the Tanaiste and Minister for Enterprise, Trade and Employment, Ms Harney, announced the appointment of IBI Corporate Finance to advise and assist the State in relation to any sale of IBI. The likely scenario is for an auction to take place which will invite bids for the company. Not an easy project but it could be completed before the end of the year. The crucial outcome will, of course, be the size of the consideration as this will determine the size of the State write-off. The timing of the likely sale is unfortunate but timely.
Unfortunate because the sale is timed at a bad time as IFI struggles in an over-supplied world fertiliser market. This has put IFI on a sliding profit trend. Timely because four-way agreements between IFI, ICI, NET and Bord Gais Eireann (BGE) runs out on December 31st 1999. Under that agreement BGE sells gas to NET at a subsidised rate; NET then sells that gas to IFI at a profit. Also, ICI receives an annual management fee of £1 million.
IFI was, in any event, facing crucial decisions. Given its product profile - it is Ireland's largest producer of bulk chemicals with 40 per cent of the Irish fertiliser market and with about 4 per cent of the European market - it is vulnerable to cycles. As such it is not a suitable candidate for a flotation on its own. It would be attractive to a larger group with more diverse interests, such as IAWS. So what sort of value can be put on IFI?
That is very difficult for a variety of reasons. Will it be based on a multiple of profits and if so, which profits would be used? The latest results, for example, showed a drop in pre-tax profits from £18.66 million to £6.95 million in the year ended September 30th 1997. A further decline is expected this year. IFI has recognised its vulnerability; yet it has failed to diversify as it had promised on numerous occasions. Other imponderables include the price of gas to a new owner of IFI. The price of energy is very important to IFI which has manufacturing operations in Cork, Arklow and Belfast. One of the largest components in the cost of sales is energy, accounting for around 25 per cent. This includes electricity but the vast bulk is made up of gas. With the gas running out at Kinsale, the new owner of IFI could well buy gas from other sources and that might be positive though some industry sources are adamant that IFI has been getting the gas from NET at a lower than market price. On the plus side, is the new £32.5 million investment at IFI's Belfast plant which is expected to result in benefits of £6 million per annum.
While all the imponderables make it difficult to estimate a value, at the end of the day the value will be what a bidder is prepared to pay. However, based on available information, it appears that the estimates of £100 million are overly optimistic. Rationalisation costs - if needed - would also have to be taken into account.
However, NET would be doing well to receive £40 million for its share. Its debts had reached a peak of £187 million in 1994/5. It had fallen to £164.8 million in 1995/6 and to £156.7 million in 1996/7, according to the latest published annual report.
NET has been able to reduce the bank borrowings from the return it receives on selling the gas to IFI, on the dividends it has received from IFI and on debt management. IFI, in line with the reduced profitability, cut the dividends payment from £7.5 million to £1.5 million last year. This could be cut further this year. NET should be able to reduce the debt further this year, albeit by a small amount. Nevertheless, it is likely to be left with borrowings which are guaranteed by the exchequer, of a whopping £150 million.
If IFI is sold without any labour problems, it appears that NET will still be left with debts of more than £100 million. That will take off some of the gloss from the estimated £300 million plus from ICC and ACCBank. The white elephant is still there - lurking in the background.
