Tide is turning for O'Dwyer pub empire

Business Opinion: The idea that the O'Dwyer brothers pub empire might be in some sort of trouble has been greeted with some scepticism. The company, which owns Cafe en Seine and a slew of other popular watering holes in Dublin, may have reported a whopping loss of €18 million last year, but that is only paper work, claim pub trade insiders.

It is easy to see why they might think this. Much of the loss, some €12 million, is attributed to writing down the value of some of pub businesses. And indeed the accounts for Full Circle, the main operating business, give the impression that in common with most private companies the group is more interested in minimising its tax bill that recording eye-watering profits.

Indeed, it is worth noting that Liam and Des O'Dwyer took some €4.8 million out of the business last year. Most of this, some €4.4 million, was by way of rent paid to the two brothers who own many of the buildings in which the group's pubs are located.

An additional €589,000 was by way of payment for the brothers' services, which was paid through a management services agreement between Full Circle and another O'Dwyer business called Dublin Sanitary Disposals Limited. Another of the O'Dwyer's companies, Stapehill Limited, gets €254,000 a year plus VAT in lease payments on equipment in one of the group's hotels, the Grafton Capital Hotel.

And finally, the group rents a warehouse for €38,686 per annum via a company called Toji holdings in which Liam O'Dwyer has an interest.

Once you take the exceptional write downs out of the equation it is quite plausible to suggest that the company is chuffing along nicely and delivering a handsome return to the O'Dwyers through a number of convoluted but completely legal and above-board mechanisms.

The only black spot is that like the rest of the industry the group is coming to turns with a fairly significant change in drinking patterns.

And there are signs that the tide is turning in this regard. According to the accounts, like-for-like trading at the group's pubs was up 3 per cent in the first four months of this trading year, with revenue at the group's hotels up 4 per cent.

Indeed, there is something intuitively appealing about this given how hard it is to conceive of a someone charging something close to €5 for a pint of beer and not make any money.

Not surprisingly, the business is strongly cash flow positive at the operating level (some €3 million in 2005) and even after net debt interest costs of €2 million on the group's debts of €49 million there is surplus cash.

However, it is wiped out by the group's capital expenditure and financing costs leaving the group cash flow negative to the tune of €3 million.

Equally unsettling is the rather tough conditions that have been insisted on by the groups bank. The notes to the accounts show that the O'Dwyers have had to increase the personal guarantees they have given from €3 million to €8 million in respect of the main tranch of bank debt, some €26.7 million, which is provided by AIB.

The debt is repayable over a 10-year schedule and these repayments have been deferred although the bank has the right to repayment on demand if it wishes.

The conditions of the loan also include the O'Dwyers forgoing the rent on their building in Mount Street which is occupied by the group at a cost to date of €1.1 million.

The terms of the other tranche of debt, €13.3 million advanced by Anglo Irish Bank, are equally stiff. Anglo's loans are also repayable on demand and are backed up by guarantees from a number of the O'Dwyers other businesses as well as personal guarantees.

Anglo is also charging 3-4 per cent above Euribor compared to the 2.5 per cent charged by the AIB.

It is pretty clear that the O'Dwyer brothers have a close working relationship with their banks to put it mildly. The two are only able to stand over the accounts being prepared on a going concern basis because they "are not aware of any circumstances existing, nor have they been served with any notice at the date of signing these accounts, which would imply the banks noted above intends to demand repayment of these facilities".

The O'Dwyers have also agreed not to seek the repayment of €9 million in loan notes.

Maybe you can charge €5 a pint and not make money.