Should the Government really support Waterford Wedgwood with public money? asks ARTHUR BEESLEY
WATERFORD WEDGWOOD'S application to the Government for State support for its crystal factory at Kilbarry is the clearest indication yet that the troubled company is running out time and money.
In the coming days, the Cabinet will have to decide whether it can place its faith in a heavily indebted organisation whose huge financial losses have seriously undermined the credibility of its management.
For generations a beacon of Irish industry, Waterford Wedgwood is knocking at the Government's door now because it is unable to raise additional money from its banks due to the extent of the covenants on its existing loans. "Everything is committed," said an informed observer.
With net debts of €473.4 million last September and a unhappy track record of capital destruction, the company has asked the Government to underwrite additional loans of some €36 million to facilitate an "orderly restructuring" of its business.
In normal circumstances, it is clear that a company in this position would have to fend for itself. But the "iconic" status of the Waterford brand - built up in hard times when Irish business had little international success to boast of - means the circumstances are anything but normal.
The company has told Ministers that there will be a serious threat to the employment of more than 500 staff who remain at Waterford Crystal if it does not receive some form of financial support from the State. Another 470 workers are already in the process of leaving Waterford, which had a staff of 3,200 in the late 1980s.
The alternative is to relocate manufacturing to a low-cost location in eastern Europe or further afield, leading to the closure of the Kilbarry plant. "There is a reality that if they can't get this kind of assistance, things would be very bleak," a high-level source said.
While it is a given that the Government is keen to avoid job losses and protect an important manufacturing operation, the request for assistance raises several concerns. Looming large among them is the danger of being called upon for further support down the line. Given Waterford's questionable record in recent years, there is an even bigger risk of being dragged into a politically damaging closure of the factory at another point in the future.
Any support would be characterised as supporting manufacturing employment in a high-skilled sector. But the Government could well be open to claims that a prime beneficiary of any underwriting of loans to Waterford would be its chairman and dominant shareholder, Sir Anthony O'Reilly.
With his brother-in-law Peter Goulandris, Sir Anthony has propped up the company to the tune of some €300 million in recent years. They own slightly more than 50 per cent of its ordinary shares and 58.8 per cent of its preference shares. In that context, State support could be construed as protecting the position of wealthy businessmen who should not be entitled to any special support for an unsuccessful investment.
If any state aid would also have to be approved by EU Commission's competition body, there is also a very strong possibility that support in this case would expose the Government to similar claims from other companies in crisis.
In its engagement with the Government, Waterford provided a business plan which is said to envisage a turnaround in about two years' time. The detailed forecasts behind the path to recovery are unclear - the company declined to outline them yesterday - but the scale of its current financial difficulty is already daunting.
Having suffered during the important Christmas period from a shortage of its own products, Waterford is expected in the coming weeks to report a loss before tax of about €100 million for the year to March.
Even after several restructuring efforts, the company continues to suffer from a high cost base and falling demand. Such difficulties are reflected in its share price, which is hovering around 1 1/2 cent at present, a level that implies a market capitalisation of some €80.3 million. This is in striking contrast to the €775 million raised by the company since 2003 through share placings, a bond issue and asset disposals.
Thus the question for Ministers is whether they can truly conclude that the latest business plan from Waterford has any realistic prospect of success.
"The company still has, despite significant and repeated rationalisation, a legacy high cost manufacturing base, which given falling demand and also current exchange rates render it less competitive than it needs to be," said John Sheehan, head of research at NCB Stockbrokers. While acknowledging "some success" in modernising the Waterford brand, he notes that its primary sector of the market - tableware - is shrinking.
"These issues are compounded by weakening consumer sentiment in some of its principal markets, including the US, UK and Ireland. The financial position of the group is stretched, with an annual financing change of approximately €50 million."
Yet in statements to The Irish Times, Waterford Crystal chief John Foley cited only factors beyond the company's control in his description of its difficulties.
"External influences, the plummeting value of the US dollar, the depression in the US and the turmoil in world financial markets, have imposed a burden on the company," Mr Foley said.
"We've asked for a Government guarantee on loans which will enable us to ensure that crystal-making continues in the south-east. Those loans would be collateralised and the Government's potential exposure would be minimised."
Such assistance would not be unknown, he said. "For instance, the UK government found a mechanism to bail out Northern Rock and the US government was able to broker a process - including state aid - to rescue Bear Stearns. In March 1985, the Irish government aided AIB by acquiring, for a nominal sum, the massively loss-making Insurance Corporation of Ireland."
Asked whether Northern Rock and the other examples cited were in a different category because of systemic risk to the financial markets, Mr Foley replied: "I argue that this is such an iconic brand and company and so part of Irish psyche, not only in Ireland but internationally, that it is every bit as important to us as those other situations in other countries."
As for the advantage to taxpayers from any such support, he said in a further statement that the benefits include not only the preservation of the brand that is Waterford but the protection of the 500 or 600 jobs in the factory and "thousands" of other jobs supported by them. He also said the factory's presence ensures that more than 300,000 tourists visit the factory every year, bringing business to hotels, bars and restaurants in the southeast.
While that stance finds some favour within Government circles, it is not clear that sympathy for the argument will translate into actual support for the company.
Yes, Enterprise Ireland and IDA Ireland are conduits for State support to private business. For indigenous industry, such support typically goes to start-up and research-heavy organisations. For international industry, such support goes to profitable companies to support employment. Only under strict conditions laid down by the EU, if at all, can it be given to loss-making indigenous companies to support employment.
For Waterford, the alternative means of raising money are to sell assets or approach shareholders for more support. The company's approach to the Government suggests a view has been formed that embarking down either of those paths would be futile.
This raises important question for the Cabinet. If investors, the people who put their money in the company and who lost their capital in its decline, are not providing further money, why should the Government provide guarantees? For the sake of a brand "made in Ireland", will the Government go down a road not taken by the very banks already exposed to Waterford?
In straitened economic times, it's a big ask. As Brian Cowen prepares to take office as Taoiseach, could he reasonably be expected to indulge in an unwitting gamble on a company which has all but been written off by the market?
