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A sale of the Irish Stock Exchange would prove a nice little earner — but it is not without risk

A sale of the Irish Stock Exchange would prove a nice little earner — but it is not without risk

It was one of the great defensive moves of the past three decades. In the wake of the Big Bang of the late 1980s, when electronic trading was introduced to global stock markets, it was expected that small regional stock exchanges would be swept away in a wave of consolidation or liquidation. Trading in shares would be concentrated in the larger stock markets, where there was greater liquidity.

The Irish Stock Exchange (ISE) found salvation on its doorstep. The nascent International Financial Services Centre became a magnet for the administration of global investment funds, and the exchange enthusiastically hitched a ride.

From its first listing in 1990, Anglesea Street claims to host more investment funds than any other stock exchange in the world, with 1,000 listing last year alone. In 2000, it listed its first debt security; there were 6,777 new bond and debt listings in 2016. These activities lend the once sleepy hollow an exotic air, with recent listings of sovereign debt by Iraq and Saudi Arabia and corporate bond issuances from Ferrari and Vodafone complementing the thousands of hedge funds already on the exchange.

A low-margin, high-volume business, the listing of obscure funds, bonds and debts buttressed the exchange against the worst of the fallout from the domestic banking collapse — that resulted in the near bankruptcy of one-third of the Dublin equity market’s capitalisation.

It is now promising to shape its future.

Earlier this summer, the ISE engaged Moelis, a US investment bank, to undertake a strategic review of its operations. It is not the first time that Moelis, broker to ICE, one of the biggest market operators in the world, has advised the ISE. Yet the potential opportunities and threats arising from Britain’s decision to exit the European Union gave this year’s review an extra impetus. ISE chief executive Deirdre Somers described Brexit as a “once-in-a-lifetime opportunity for Ireland”, and berated Irish and EU authorities for failing to address the potential with enough urgency.

The Moelis review quickly evolved into a discussion over the need to find a strategic partner, and is now exploring a possible sale of the 221-year-old exchange. A shortlist of bidders has been drawn up and a new owner could be chosen by the end of the year. From facing possible extinction 25 years ago, the exchange could be worth up to €120m.

The logic for selling the ISE — unlocking cash for member stockbroking firms — has led to most of the world’s leading bourses engaging in corporate activity of some sort since the 1990s. Although a late starter, Dublin has already taken steps in this direction, with member firms pocketing €4.6m each by demutualising the exchange in 2014.

The proceeds from the sale now under way would be far greater. If estimates of the price tag for the exchange prove to be accurate, Davy stands to gain €45m. Goodbody Stockbrokers would pocket €32m. This is considerably more than the fire sale price of €24m that the Kerry-based financial services group Fexco paid to buy Goodbody from AIB in the aftermath of the banking crisis in 2010.

The risk of selling out to a larger operation, especially a colossus such as the London exchange, is that Dublin could be hollowed out in the pursuit of post-deal synergies. Brokers might end up paying dearly for a windfall if trading activity is shifted elsewhere under new ownership and commissions dwindle.

The symbiotic relationship between exchange and brokers means they cannot view their holdings as a purely financial investment. Squeezing maximum value from their investment may be a secondary consideration. To earn commission, their priority must be for the exchange to maximise trading activity in Dublin and to nurture continuously more companies to the stage where they are ready to list their shares publicly.

The economic recovery has been exceptionally good for the exchange, with the listing of three real estate investment trusts, two housebuilders and a hotel company, all created to exploit the ruins of the property crash. More than €1.1bn was raised from new equity listings in the first nine months of this year, more than double the total for all of 2016. Housebuilder Glenveagh Properties, the most recent arrival, raised €500m when it floated in Dublin.

Twelve companies are also participating in an IPO mentoring programme that aims to get them ready for an eventual listing on the exchange. New members are important for the exchange, particularly as they counter the worrying trend of large Irish corporates — such as DCC, Greencore and UDG — shifting their main listing to London.

The listing revival is also an attraction for a potential buyer, said John Cotter, a professor of finance at University College Dublin. “It shows that money is being raised by new companies listing in Dublin, which will generate subsequent trades in a world where new issues have contracted considerably.”

While Ireland’s corporate titans tend to have divided loyalties, with dual listings in Dublin and London, the bulk of trading for some remains on home turf. In Ryanair’s recent standoff with its pilots, for example, most of the trading by nervous and opportunistic investors was conducted in Dublin rather than London or the Nasdaq, where the airline is also listed, according to an analysis by Cotter.

The real meat for brokers, though, lies in the trading of Irish government bonds. Almost €13bn was raised by the state in the first nine months of the year, dwarfing the amount of equity raised by companies listed on the exchange. This represents a big reversal from the boom era of the early 2000s, when the exchequer coffers were flush and redemption of debt exceeded the need for new borrowing.

“Equity listings are shrinking — it’s an international phenomenon with fewer companies listed around the world — but the Irish Stock Exchange has been able to compensate with more trading in government securities,” said Cotter.

The constant back-up, however, has been the growth in debt and fund listings. These provide no spin-off benefits for stockbrokers. Most of the downstream benefits flow to Dublin’s big law firms. With the exception of Davy, no other stockbroker is involved in listing these securities.

Issuers tend to use Dublin as a flag of convenience for regulatory purposes, rather than a genuine source of liquidity for investors. There is almost no trading of these securities in Dublin. One source described it as “a cookie cutter” business, yet the resident expertise here means issuers can arrange a bond listing on an EU-regulated exchange in a matter of days. Debt listings accounted for €15.6m of the exchange’s revenues of €29.2m last year.

London Stock Exchange Group (LSEG) would seem a natural partner — the ISE merged with London in 1973, and was part of the group for 22 years. LSEG may see Dublin as a beachhead into Europe post-Brexit. The question is whether Dublin brokers would be happy to see the local market fall under the control of its biggest rival for listings. Dublin uses Deutsche Börse’s technology on its trading platform. The US company Bats and Euronext, formed from the merger of Amsterdam, Paris and Brussels, will also have run the rule. “The past 10-15 years has been marked by consolidation of stock exchanges around the world driven by deregulation and developments in technology that have reduced the fees associated with trading,” said Cotter.

“The cake is getting smaller and commissions are under pressure at the same time. It’s very hard to answer yes if the question is whether the Irish Stock Exchange will be a bigger player in 10 years’ time.”

Big boys in charge as days of Dame Street are long gone

When RTE reporter Brian Cleeve compiled a report on how to invest on the stock market in 1965, he noted that the first port of call for investors would most likely be one of the 32 stockbroking firms with offices close to the exchange premises, off Dublin’s Dame Street. Like the double-deckers in the RTE archive clip, the vast majority of these firms are now out of commission. The bulk of the trading on the Dublin market is conducted through two houses. For example, one day last week, Davy accounted for 48.5% of trades in Glanbia, Goodbody accounted for the other 51.5%.

Up to a decade ago, these brokers were owned by the country’s two largest banks. Bank of Ireland sold its 90% stake in Davy to management for €316m in 2006. AIB was much less fortunate, forced to offload Goodbody to Kerry financial services group Fexco for €24m at the height of the banking crisis in 2010. It is believed Fexco has since recouped the purchase price through capital distributions, allowing senior executives to gain a large minority stake through an earn-in agreement.

If the Irish Stock Exchange sale goes ahead, market sources say, Fexco could look to put its Goodbody stake on the block, and reap an enormous profit. The most likely buyers are Investec and Cantor, which entered the market here though the purchase of brokers NCB and Dolmen respectively.