SQ is not a stand-alone decision-making robot, it has owners. The owners own a going-concern grocery business and they have also invested poorly in property. The owners owe the money and the owners own the business (I'm sure there are multiple companies within the SQ private company which enables this separation to take place).
Receiver appointed to Superquinn
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Brendan Burgess
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Hi Joe
We might have to go right back to basics to explain this.
We have to distinguish between two legal entities
sole proprietor and limited company.
Any of these can have a trading name e.g. Superquinn. But Superquinn is not a legal entity.
A building is an asset. It does not own anything. It is owned by a legal entity.
In the current case, the legal entity is a limited company called Select Retail Holdings Limited
It borrowed money which it used to buy assets e.g. buildings and the business.
This company, presumably, is now insolvent. Its assets are less than its liabilities.
Select Retail Holdings Limited converts its property and business assets into cash by selling them to Musgrave Ltd. The cash is used to repay the loans as much as possible. What is left is an insolvent company with no assets but with liabilities.
What you and Rainyday seem to be suggesting is that Musgrave Ltd should pay good money to acquire a comination of assets and liabilities, where the liabilities exceed the assets.
If the assets were worth €400m and the loans were €300m, then Musgrave Ltd would buy the package for €100m. But if the loans are €400m and the assets are only €300m, then they would require to be paid to take on net liabilities.
Back to the simple house analogy. If a buyer at the Allsop auction valued a house at €100k, he paid €100k for the house. He does not care if the seller originally paid €50k for the house or €500k for it. He does not care if there is a mortgage of €50k or a mortgage of €500k.
he paid €100k and got an asset worth €100k.
Likewise Musgraves paid €x for an asset. They did not buy the liabilities. If they had done so, they would reduce the €x by the amount of the liabiliities.
We might have to go right back to basics to explain this.
We have to distinguish between two legal entities
sole proprietor and limited company.
Any of these can have a trading name e.g. Superquinn. But Superquinn is not a legal entity.
A building is an asset. It does not own anything. It is owned by a legal entity.
In the current case, the legal entity is a limited company called Select Retail Holdings Limited
It borrowed money which it used to buy assets e.g. buildings and the business.
This company, presumably, is now insolvent. Its assets are less than its liabilities.
Select Retail Holdings Limited converts its property and business assets into cash by selling them to Musgrave Ltd. The cash is used to repay the loans as much as possible. What is left is an insolvent company with no assets but with liabilities.
What you and Rainyday seem to be suggesting is that Musgrave Ltd should pay good money to acquire a comination of assets and liabilities, where the liabilities exceed the assets.
If the assets were worth €400m and the loans were €300m, then Musgrave Ltd would buy the package for €100m. But if the loans are €400m and the assets are only €300m, then they would require to be paid to take on net liabilities.
Back to the simple house analogy. If a buyer at the Allsop auction valued a house at €100k, he paid €100k for the house. He does not care if the seller originally paid €50k for the house or €500k for it. He does not care if there is a mortgage of €50k or a mortgage of €500k.
he paid €100k and got an asset worth €100k.
Likewise Musgraves paid €x for an asset. They did not buy the liabilities. If they had done so, they would reduce the €x by the amount of the liabiliities.
Complainer
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This is far from being a normal business transaction in a normal business environment. If this were a normal business environment, the question of who pays what to who is entirely a private matter for the parties concerned. However, given that we have effectively nationalised banks, the matter of who loses out (i.e. the State) is a very public matter and a very public concern.
Superquinn CEO Andrew Street confirmed on the 6 pm News this evening what I said early this morning, basically that the receivership was a device to allow the business to walk away from their property debts. The very public concern is that these debts are now left to the taxpayer to cover, via the nationalised bank.
It is particularly disappointing that the Quinn family choose to sell to the highly leveraged buyer, given the risk involved to the business and the State. They had a particular opportunity to create an employee-owned business, like John Lewis in the UK, and still walk away with more money than they could ever hope to spend in a lifetime. There is a certain obscenity about the taxpayer being left to pick up a debt of some hundreds of millions of euro, while a new buyer gets to buy a thriving business at a bargain price. This is morally wrong.
There is a very real question about the 'prepack' nature of this receivership. How can anyone stand up and say 'the price from Musgraves was the best value for money available' given that the deal was done in 8 hours. Why the mad rush? Why not an examinership to give the business time to review all options? At a minimum, the deal should include some kind of long term repayment deal for the taxpayer, whereby the debt gets cleared through the long term profits of the business.
Superquinn CEO Andrew Street confirmed on the 6 pm News this evening what I said early this morning, basically that the receivership was a device to allow the business to walk away from their property debts. The very public concern is that these debts are now left to the taxpayer to cover, via the nationalised bank.
It is particularly disappointing that the Quinn family choose to sell to the highly leveraged buyer, given the risk involved to the business and the State. They had a particular opportunity to create an employee-owned business, like John Lewis in the UK, and still walk away with more money than they could ever hope to spend in a lifetime. There is a certain obscenity about the taxpayer being left to pick up a debt of some hundreds of millions of euro, while a new buyer gets to buy a thriving business at a bargain price. This is morally wrong.
There is a very real question about the 'prepack' nature of this receivership. How can anyone stand up and say 'the price from Musgraves was the best value for money available' given that the deal was done in 8 hours. Why the mad rush? Why not an examinership to give the business time to review all options? At a minimum, the deal should include some kind of long term repayment deal for the taxpayer, whereby the debt gets cleared through the long term profits of the business.
Brendan Burgess
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Complainer
You are still mixing up lots of different things here.
1) it was immoral for Fergal Quinn to sell the business for a high price 5 years ago. I think few would agree with you, but you are entitled to your own sense of morality I suppose.
2) It was immoral for Fergal Quinn to sell it to a company which had to borrow. Again, I would not agree with that either.
3) It was stupid of the banks to lend the money to the buyers. No more nor no less stupid than any of the other property based deals.
4) It was immoral for Musgraves to buy the business from the receiver without agreeing to pay the debts as well. I and others have explained this, numerous times.
Any losses borne by the state were incurred when the loan was given and when the banks were nationalised. The sale of the business to Musgraves minimises the loss to the banks and to the state. We should be rejoicing at Musgrave's decision to buy it.
Appointing an examiner is an interesting issue. It is very expensive and very disruptive. Musgraves may well have pulled out by the time the examinership was completed.
Brendan
You are still mixing up lots of different things here.
1) it was immoral for Fergal Quinn to sell the business for a high price 5 years ago. I think few would agree with you, but you are entitled to your own sense of morality I suppose.
2) It was immoral for Fergal Quinn to sell it to a company which had to borrow. Again, I would not agree with that either.
3) It was stupid of the banks to lend the money to the buyers. No more nor no less stupid than any of the other property based deals.
4) It was immoral for Musgraves to buy the business from the receiver without agreeing to pay the debts as well. I and others have explained this, numerous times.
Any losses borne by the state were incurred when the loan was given and when the banks were nationalised. The sale of the business to Musgraves minimises the loss to the banks and to the state. We should be rejoicing at Musgrave's decision to buy it.
Appointing an examiner is an interesting issue. It is very expensive and very disruptive. Musgraves may well have pulled out by the time the examinership was completed.
Brendan
Ok so apparently, musgraves paid €100m for the business which included I think 11 properties in Dublin and a distribution centre. Therefore, the banks will take the €100m and reduce the debt. I have a feeling the property portfolio of select property is larger than what was sold to musgraves and the banks will still have a charge over them. It is impossible to work out what the banks losses will be but I am willing to bet they did not accept a 25% recovery rate on the loans. The real losers could be unsecured creditors.
I agree with Complainer about the nature of the deal and the way it was done but as Brendan says, we should be delighted that someone was willing to take the business as a going concern. None of the other grocery chains operating here would have done that. It would have been a pure property deal.
I agree with Complainer about the nature of the deal and the way it was done but as Brendan says, we should be delighted that someone was willing to take the business as a going concern. None of the other grocery chains operating here would have done that. It would have been a pure property deal.
Complainer
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Not trying to be pedantic, but I didn't say the sale by Fergal Quinn was immoral, and I didn't raise a concern about the high price. I sait it was disappointing, and I raised a concern about selling it in a leveraged buyout.
Agreed.
Again, that's not what I said. I didn't criticise Musgraves, who are presumably just out get the best deal they can. It is immoral for the State through the banks to be left to pick up the tab for property speculation, when there is a viable long-term business here that will be well capable of paying these debts in the long term, albeit longer than they had planned under their current banking arrangements.
How can you be sure that the rushed sale to Musgrave's minimises the loss to the bank? How can you be sure that a higher price could not have been achieved from an international seller, if the sale had been given more time?
Examinership doesn't seem to have done too much damage to Quinn Life. Musgraves might indeed have pulled out, but others (particularly international buyers) might have been pulled in.
LDFerguson
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The business was sold to Select in January 2005,which presumably means that the deal was put together in late 2004. The property and banking sector looked VERY different then.
Are you seriously suggesting that the Quinn family should have turned down a good offer to buy their business because they should have foreseen how things might turn out by 2011?
Brendan Burgess
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Complainer said
OK, so you are saying that someone or something is immoral.
I am genuinely trying to identify the evil, immoral person you are speakin about. I broke down the various actions in the earlier post and I don't think anyone did anything immoral. Stupid, yes. Immoral, no.
Go back to the house analogy.
If I sold my house for €400k in 2005, when I felt it was worth only €200k, was that immoral?
If I sold my house to a first time buyer who borrowed €400k, was that immoral?
Was it stupid for the borrower to borrow that much? Maybe so, although it didn't seem like that at the time.
Was it stupid for the bank to give the mortgage? Maybe so, but it did not seem like that at the time?
If an unrelated third party buys the house for €200k now, is that immoral?
The borrower is probably unemployed and can't repay the deficit. If the bank writes that off, is that immoral?
You and JoeB seem to suggest that a buyer of the house now for €200k should give some share of potential growth in value back to the bank or government. To me, that would be immoral.
OK, so you are saying that someone or something is immoral.
I am genuinely trying to identify the evil, immoral person you are speakin about. I broke down the various actions in the earlier post and I don't think anyone did anything immoral. Stupid, yes. Immoral, no.
Go back to the house analogy.
If I sold my house for €400k in 2005, when I felt it was worth only €200k, was that immoral?
If I sold my house to a first time buyer who borrowed €400k, was that immoral?
Was it stupid for the borrower to borrow that much? Maybe so, although it didn't seem like that at the time.
Was it stupid for the bank to give the mortgage? Maybe so, but it did not seem like that at the time?
If an unrelated third party buys the house for €200k now, is that immoral?
The borrower is probably unemployed and can't repay the deficit. If the bank writes that off, is that immoral?
You and JoeB seem to suggest that a buyer of the house now for €200k should give some share of potential growth in value back to the bank or government. To me, that would be immoral.
I was listening to Matt Cooper yesterday evening and a commentator alluded to the fact that because of the debt burden on SQ, they were effectively starved of the necessary credit to invest in the supermarket side of the business. I've noticed the relatively zero level of advertising by SQ in the papers in the past few months...it's no wonder the other retailers are increasing their profits. So I don't think they could ever repay the loans whislt still competing with the other chains.
Given the nature of the business, had a buyer not being found, then there would be a lot of empty shelves in a small period of time. There would have been large scale redundancies and given the extremely low profit margins, the company would have experienced losses immediatly resulting in closure. All that would remain would be a few staff and some empty supermarkets....not sure if this would have attracted a higher price.
I'm not saying the deal is 100% good and I'm sure the devil is in the detail, but most of the parties seem to have done OK out of it. The State is getting something (which is more than it's getting for the other NAMA pproperties), workers keep their jobs and yes Musgraves are getting what could be the deal of the decade for them....but then again who knows....it may be a terrible move, but they are taking the risk I guess.
I think there are two issues here.
The wider underwriting on the banking sector by the people of Ireland (and the people of Europe through liquidity funding) is one issue.
The sale of Superquinn is another.
The damage was done to Superquinn when their last owners bought the business from the Quinn family. The losses to the banks are a result of their stupidity in financing that deal. Why should the new owner be responsible for that? The banks screwed up; they should take the hit. That’s reasonable, logical and moral.
I think Complainer’s problem is with the fact that the people of Ireland are footing the bill for the banks stupidity. In that I agree with him but there ‘aint nothing we can do about that now. His anger, in my opinion, is understandable and reasonable but is directed at the wrong transaction.
The wider underwriting on the banking sector by the people of Ireland (and the people of Europe through liquidity funding) is one issue.
The sale of Superquinn is another.
The damage was done to Superquinn when their last owners bought the business from the Quinn family. The losses to the banks are a result of their stupidity in financing that deal. Why should the new owner be responsible for that? The banks screwed up; they should take the hit. That’s reasonable, logical and moral.
I think Complainer’s problem is with the fact that the people of Ireland are footing the bill for the banks stupidity. In that I agree with him but there ‘aint nothing we can do about that now. His anger, in my opinion, is understandable and reasonable but is directed at the wrong transaction.
J
JoeB
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Well, I get it now to a degree.
Is the following correct?
A person wants to buy a house, so they, personally, apply for a loan. The bank is prepared to give a loan, but only with security.. and they want the house as security. Having the house as security means that the lender has control over certain aspects of the house.. mainly the ability of the owners to sell their own house. So the owners can no longer sell their own house, they can only do so if the lender agrees. And the lender never agress if it will leave a shortfall.
So Superquinn want a loan... and Superquinn, in it's own right, is applying. (Superquinn the company, a legal person in its own right, applies for a loan),.. of 400m say. Do the bank want security on this loan?, and what security do they take?
(If the bank don't want security there's a problem,.. but it should be a problem for the silly bank, and not for anyone else.)
(If Superquinn itself doesn't apply for a loan, but instead owners do.. well then the bank must have security on the individuals who applied, and they probably couldn't care less what happens to SQ, if the bank have adequate security on the owners themselves)
So in the SQ case, the bank likely have security on SQ itself, on SQ business, or on SQ property. And wouldn't this mean that the bank can block sales? So how can a receiver sell such a company if banks have the final say on selling?
So, in my opinion, SQ can only be sold if the bank agree to take a hit. The banks could choose to take hits on private house sales in neg. eq. but they don't. So the banks seem to write off huge loans, but not smaller ones.
I get the point though,.. if SQ has assets of 200m and debts of 400m, then SQ is worthless... in fact it's worth negative money. So yes, SQ simply cannot continue, and isn't worth buying unless the debts can be wiped... because as Brendan says.. if both assets and debts are sold SQ would have to pay the new buyer 200m.. and they don't have it.
So the bank appear to be happy now, to get the 200m market value of the business, and write off the other 200m (All figures are made up, and are likely wrong). The laternative may be to get less. The social aspect should not be considered by the bank at all, .. it should be entirely a commercial decision, .. nothing to do with the social damage a failed SQ could cause. Unless the government want to intervene in the public interest, through legislation, or regulation or whatever. So the bank should be able to demonstrate that no better deal was possible... and I can't see how they were assured, if they did actually agree to sell to what must have been the first bidder.
But why should such an important decision, to wipe the debts, be left to the bank anyway, especially if the bank cannot take the hit? (well, only if the bank cannot take the hit, if they can, fine, take whatever hits they want and can afford). So both the bank and SQ are bankrupt now (if the bank cannot take the hit), and both should fail. (I understand that it might not be clear that the bank cannot take the hit, perhaps they can and the shareholders won't be happy)
But if the bank is government owned, then the government should be in the board room actually running the bank,. and a government minister should be writing the cheques. If a Gov. Minister was writing the cheques then there'd be no problems with bonuses etc, and we'd have a fair and consistent approach to writing off debts, instead of each bank operating according to its own whims. The government could also take social factors into account, which should be disallowed for a private bank.
I don't understand why government owned banks (i.e majority owned) continue to run themselves, in the same failing way as previously. Why doesn't the government use its veto vote to run the bank itself? Why do we accept our government saying things like 'well, the private bank, which we own, is making its own decisions, which we don't like, and despite the fact that we own the bank, we claim we can do nothing,..."... that's what happened in relation to bonuses.
Is the following correct?
A person wants to buy a house, so they, personally, apply for a loan. The bank is prepared to give a loan, but only with security.. and they want the house as security. Having the house as security means that the lender has control over certain aspects of the house.. mainly the ability of the owners to sell their own house. So the owners can no longer sell their own house, they can only do so if the lender agrees. And the lender never agress if it will leave a shortfall.
So Superquinn want a loan... and Superquinn, in it's own right, is applying. (Superquinn the company, a legal person in its own right, applies for a loan),.. of 400m say. Do the bank want security on this loan?, and what security do they take?
(If the bank don't want security there's a problem,.. but it should be a problem for the silly bank, and not for anyone else.)
(If Superquinn itself doesn't apply for a loan, but instead owners do.. well then the bank must have security on the individuals who applied, and they probably couldn't care less what happens to SQ, if the bank have adequate security on the owners themselves)
So in the SQ case, the bank likely have security on SQ itself, on SQ business, or on SQ property. And wouldn't this mean that the bank can block sales? So how can a receiver sell such a company if banks have the final say on selling?
So, in my opinion, SQ can only be sold if the bank agree to take a hit. The banks could choose to take hits on private house sales in neg. eq. but they don't. So the banks seem to write off huge loans, but not smaller ones.
I get the point though,.. if SQ has assets of 200m and debts of 400m, then SQ is worthless... in fact it's worth negative money. So yes, SQ simply cannot continue, and isn't worth buying unless the debts can be wiped... because as Brendan says.. if both assets and debts are sold SQ would have to pay the new buyer 200m.. and they don't have it.
So the bank appear to be happy now, to get the 200m market value of the business, and write off the other 200m (All figures are made up, and are likely wrong). The laternative may be to get less. The social aspect should not be considered by the bank at all, .. it should be entirely a commercial decision, .. nothing to do with the social damage a failed SQ could cause. Unless the government want to intervene in the public interest, through legislation, or regulation or whatever. So the bank should be able to demonstrate that no better deal was possible... and I can't see how they were assured, if they did actually agree to sell to what must have been the first bidder.
But why should such an important decision, to wipe the debts, be left to the bank anyway, especially if the bank cannot take the hit? (well, only if the bank cannot take the hit, if they can, fine, take whatever hits they want and can afford). So both the bank and SQ are bankrupt now (if the bank cannot take the hit), and both should fail. (I understand that it might not be clear that the bank cannot take the hit, perhaps they can and the shareholders won't be happy)
But if the bank is government owned, then the government should be in the board room actually running the bank,. and a government minister should be writing the cheques. If a Gov. Minister was writing the cheques then there'd be no problems with bonuses etc, and we'd have a fair and consistent approach to writing off debts, instead of each bank operating according to its own whims. The government could also take social factors into account, which should be disallowed for a private bank.
I don't understand why government owned banks (i.e majority owned) continue to run themselves, in the same failing way as previously. Why doesn't the government use its veto vote to run the bank itself? Why do we accept our government saying things like 'well, the private bank, which we own, is making its own decisions, which we don't like, and despite the fact that we own the bank, we claim we can do nothing,..."... that's what happened in relation to bonuses.
I think the assumption here is flawed (and will now go on and make some assumptions of my own that are probably also flawed).
As Superquinn is private, details on profitability are not available, but Musgraves in 2010 generated a profit before interest and tax of EUR74.9m on sales of EUR4.4bn. Superquinn is a smaller company, the Irish Times quoted a revenue figure of approximately EUR500m.
If you make the (questionable) assumption that Superquinn generates a similar margin to Musgraves, that would give a profit before interest and tax of EUR8.5m.
The interest bill on EUR400m debt at an interest rate of 4% would be EUR16m p.a.
While Superquinn may be a long term viable business, it does not appear to be capable of servicing (let alone repaying) that level of debt even over a prolonged period. Nobody was going to buy a business with an unsustainable debt burden and some level of writedown was inevitable. The issue of the taxpayer taking the hit for this and other property related fiascos is separate and discussed extensively elsewhere.
There's no way SQ was sold in 8 hours or to the only bidder to consider it. Musgraves wouldn't have had time to do their buyers due diligence, never mind the sellers assuring themselves they were getting the best deal (which may have been the only deal if no-one else wanted to bid). According to today's Irish Times:
"TALKS ON the deal that yesterday led to Musgrave agreeing to take over troubled grocery chain Superquinn began in earnest last week, but the negotiations were really the latest staging post in a process that got under way earlier this year"
"In December, it appointed a new chief executive, Andrew Street. At the start of this year, he began implementing changes designed to generate more cash from the chain.
In tandem with this, the company began a formal process designed to find either a new investor or a buyer that could inject new cash into the business.
Musgrave’s, a wholesaler that owns a series of supermarket and convenience store franchises, was, along with British and international companies, one of a number of candidates which ran the rule over Superquinn at that stage.
However, its liabilities made the business so unattractive that nobody was prepared to do a deal, or at least not while it was carrying the burden of big property debts.
That meant the company was running out of options. In the end, its banks decided a receivership offered them the best way of separating the trading business from the property loans, and selling it with the aim of recovering some of their debt."
We're gonna make so much money it will be like the SSIA on steroids!
Complainer
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The immorality lies with the banks (aka the State) allowing a prepack recievership to go through. They allowed Superquinn/Select to negotiate a deal with Musgraves, and rushed it through without taking the time necessary to ensure they got best value for the tax payer.
Other retailers have gone through examinerships - Chartbusters, Hughes & Hughes, Bestseller (Vero Moda, Jack Jones) - and come out the other side. I appreciate the SQ is a very large business, but other large businesses have gone through examinership as well.
Since when did a €200m loss for the State become a good deal. And as for the risk, sure if Musgraves borrow the money, no doubt the taxpayer will kindly cover any losses in the future too.
So do you reckon that Musgraves are going to wait 23 years to get a return on their investment?
Fully agree, Orka. I can't understand how the banks clearly let Superquinn/Select negotiate a deal with Musgraves, when in fact, the banks are the owners (in a recievership). It should have been the banks doing the negotiating and ensuring that they got best value for money. Surely there was conflict of interest here?
Does anyone know the legalities around ensuring value for money in a recievership? I read on boards.ie or p.ie that they had to get somebody to sign off on an 'independent valuation', which seems like an amazingly light regulation.
There is no €200m loss for the taxpayer. Figures are been bandied about but apparently State supported banks were owed less than €275m. They apparently sold the business for €200m. This will go to the banks. Apparently Select Properties are left with some property interests that can be liquidated and the banks retain charges over so the losses are further reduced. The banks actually did the right thing by the taxpayer. (lending in the first place is a different argument)
Again, these companies all deal in non-perishable goods with few suppliers. It makes them easier to shut and re-open. Supermarkets have very extensive supply management issues
Perhaps losing 200m was the best case scenario?
I take your point. Since this whole thing (Sept '08) came about, there has been nothing done IMO to prevent this from happening again. From what I gather though, in this case, the Musgraves are almost exclusively engaged in retail.