Cantillon: Examinership needs to be examined all over again

Yet another stalwart of Irish consumer retailing keeled over yesterday, as WB Peat & Company – known colloquially as Peats of Parnell Street – announced it would cease trading with immediate effect. But what does this say about its "rescue plan", formulated a little over 12 months ago at a cost of almost €170,000 and approved via an examinership process by a High Court judge?

In terms of its business model, Peats, one of the best-known electronics retailers in the country, was still on analogue in a world long since gone digital. Its customers retained remarkable affection for the brand, but it was facing the proverbial perfect storm: consumers were migrating online and it wasn’t; it was reliant on discretionary spending and, as an independent retailer, it didn’t have the luxury of a parent-group guarantee to help it trade its way out of trouble.

Last year’s rescue plan envisaged the company breaking even this year with two Dublin stores. How feasible was that projection? The sheer duration of the consumer spending famine that kyboshed Peats has shocked the industry. But was anybody predicting any respite 12 months ago when the plan was being assessed by the High Court? The family that owns the company has lost hundreds of thousands of euro since, in an utterly fruitless attempt to keep it afloat.

Examinership was introduced to Ireland more than 20 years ago, originally to help save Larry Goodman's beef processing empire. It has since been successfully used by some of the biggest firms in the state, such as Eircom, to formulate survival plans. Bigger retailers such as Homebase and B&Q, who can cope with the expensive examinership fees, also appear to be using the process almost routinely to cram down their boom-time rents.

It has become obvious, however, that the entire examinership system needs an overhaul for smaller firms. The one-size-fits-all ethos of the system is defunct. The current system is too expensive, and its outcomes too unpredictable, to be considered fit for purpose for the SME sector.

Ryanair and the watchdog

It seems almost certain that the UK Competition Commission will this week order Ryanair to sell all or most of its 29.8 per cent stake in rival Aer Lingus.

The watchdog signalled in May that it was likely to seek this remedy in a preliminary finding from an 11-month investigation into how the stake affects competition between the pair in routes between Ireland and Britain.

It concluded that Ryanair’s presence on the Aer Lingus share register commercially weakened the smaller carrier and could put others off bidding for it. Ryanair responded by pointing at the high level of competition on the Irish-British routes.

It then said that it would happily sell its shares to any other European airline that manages to get 50 per cent acceptances – not including its stake – for an offer for Aer Lingus.

Chief executive Michael O’Leary has argued that there are no real grounds for the commission’s finding and says his company will appeal it to every possible legal forum.

The appeal will join the 20 or so legal actions and investigations involving Ryanair, various European airports, national governments and the EU authorities that are mainly focused on state aid of one sort and another.

It is likely to be at least two years before there is a resolution. Thus, the ruling is unlikely to have any immediate impact and Ryanair will stay on as an Aer Lingus shareholder, at least until the appeals process runs out of road.

Aer Lingus would like to see its rival dispose of the shares quickly, but, along with the markets – and everyone else – it presumably recognises that this is not going to happen.

For the moment, the airline has a number of other challenges to face, including getting a settlement to the long- standing row over a €780 million deficit in the Irish Aviation Superannuation Scheme. Analysts believe that achieving this would help it unlock further value.

United Drug gives investors a sanitised version of operations

The disclosure yesterday that United Drug was involved in supplying up to $1.4 million of cancer drugs to hotel rooms in various European cities over a seven-year period in an exercise that led subsequently to an investigation by both the US and Irish regulators will have been news to shareholders.

Indeed, news that such an investigation took place at all was not something investors appear to have been made aware of.

Despite its status as a listed company, its production of quarterly financial statements along with trading statements and interim management statements “in accordance with requirements under the EU Directive 2004/109/EC”, quaintly named the “Transparency Directive”, details of this lengthy involvement in a scheme that now appear to have facilitated the illegal import into the United States of drugs by the wife of a pharmacy owner apparently did not merit a line.

Following the launch of the investigation by the Irish Medicines Board and the Food and Drug Administration, United Drug decided to close down the unit involved. Again, not a word. Lest anyone think the case is not serious, the pharmacist’s wife – Robin Simon from Pittsburgh, Pennsylvania – faces a maximum sentence of 30 years and/or a fine of up to $500,000 at a hearing in December after pleading guilty to the offence last week. It was reported in the US that the couple has already paid $600,000 to entities including the FDA to settle a civil action.

Back in 2007, United Drug was rightly keen to highlight its initial entry into both continental European and US markets through a series of acquisitions. Chairman Ronnie Kells noted in his 2007 annual report statement that, “for the first time in our history, in excess of 50 per cent of our profit was earned from outside our domestic market”– presumably some of its from those illicit deals.

Of course, details of these deals and of the geographic profit spread had already been reported. It doesn’t say much for the company, or corporate Ireland in general that nowhere in the 119 pages of that 2007 annual report – or the 102 pages of the following year’s tome – no space could be found to accurately inform investors of all aspects of the company’s performance and behaviour in those years.