Date: 08 May 2009
Publication: Irish Times Business
Author: Arthur Beesley
THE FRIDAY INTERVIEW/Michael Smurfit: TWO YEARS into his retirement, Michael Smurfit watches the rampant disruption in the business world with concern. Dire stock markets have dented the fortune he accumulated during his time in charge of the Smurfit packaging empire, but he does not hanker after the fray. Not at all.
“I thought I was going to miss it more, but that hasn’t been the case,” he says from Monaco, the tiny Mediterranean principality where he has lived for almost 20 years. “It’s fine. For the first time in my life, I’ve time for myself.”
Smurfit, who turns 73 this summer, was the driving force behind the international expansion of the then Jefferson Smurfit, now Smurfit Kappa. As such, he ranked among the first generation of Irish businesspeople to march on the global stage.
Last night, President Mary McAleese presented him with a special award from UCD in recognition of his financial contribution to the university, whose graduate business school bears his name. “It’s a great honour that they’ve given me,” he says.
For all his vast experience, Smurfit admits to being surprised at the scale and depth of the economic crisis. “I don’t think anybody foresaw how fast these events would unfold. I would consider myself relatively astute at watching these things but I didn’t see it coming. If I had, why would I have kept a share or a piece of land or anything? By the time you woke up to the seriousness of the problem, it was too late to sell and too late to do anything about it, and a lot of people are stuck in that particular situation. I don’t think I’m alone in it.”
Still, he says it is best to remain calm amid the current distress and avoid succumbing to paranoia. “That’s my advice. It will pass. I’ve been in storms before, particularly bad ones, but they’ve all cleared away eventually.”
Though it is often unloved by the stock market, the packaging business has been good to Smurfit. Habitually well-paid in his working life, he received €9.71 million in compensation for his loss of office when the business returned to the stock market in 2007.
Floated at €16.50, the shares rose to €20.88. Since then, however, the downward slide has been relentless. The stock currently trades at around €1.80 and dropped below €1.02 last autumn.
This, no doubt, has been a painful experience for Smurfit, who says he remains the largest personal shareholder in the business. He will not quantify his stake so his losses cannot be gleaned with precision, but they are such that he refers to the “ex-personal personal wealth” lost in the decline of his shares.
“It’s only two years ago that, if you didn’t have debt in a company, you were considered ignorant and a company that wasn’t using its balance sheet. Now if you’ve got debt on your balance sheet, you’re considered to be going bankrupt. It’s a crazy situation and one I find hard to fathom,” he says.
Standing at €3.18 billion at the end of 2008, Smurfit Kappa’s debt is indeed significant. “The market capitalisation of the company is something like €300 million and they have €700 million of cash. Of course they have a lot of debt but none of that debt matures for quite a bit of time. I imagine that they’re going to have some covenant issues but that’s not necessarily a big deal,” he says.
What kind of covenant issues does he imagine it will have? “I don’t know for a fact the details of it, but I just got the annual report. They have to have ebitda [earnings before interest, tax, depreciation and amortisation] numbers and it’s possible that next year or the year after they might struggle to meet those ebitda numbers given the severity of the downturn which I’m sure they’re seeing. The packaging business has had a very sharp fall-off, which I think every sector has.”
He stresses, however, that analysts who cover the company say there is no danger of a breach of covenants. “They thought it would get close to it but wouldn’t breach. Then they put a buy on the shares. The shares went from €1.40 to €1.60.”
Smurfit’s son Tony is chief operations officer of the business, but he says he has no hotline into the company and knows no more about its affairs than “the average Joe Bloggs”. “I’m very careful not to have a line into the company because I want to retain my freedom to deal in the shares of the company as I see fit. I do get all the analysts’ reports still.”
Asked if there was anything he would like to see Smurfit Kappa do amid the current malaise, he says he is not in a position to give advice to the company because he “wouldn’t know too much” about the assets acquired in 2005 from Dutch firm Kappa Packaging.
Smurfit’s losses do not stop with Smurfit Kappa. He is a “very large” shareholder in his brother Dermot’s company, Powerflute, operator of a mill in Finland.
Floated at £1.10 a share on the Alternative Investment Market in London in 2007, the stock now trades at around 17p. “It’s been tremendous wealth destruction in the industry – and it’s not just the Smurfit share price.”
Notwithstanding these losses, Smurfit says he has retained “the bulk” of his assets.
“I spread my assets over quite a number of sectors and have areas which have done pretty well. When we went public with Powerflute, I sold half my equity at that time and that was quite a large sum of liquidity coming in.”
As an investor in AIB and Bank of Ireland, he could not avoid the flameout in the Irish banking sector. “The loss could have been significantly higher, put it that way,” he says. “I sold my shares some time ago. My son Tony read it pretty carefully. We speak every week about stocks and shares. We just decided to unload our bank shares about a year-and-a-half ago. We took a caning in them but we didn’t take as much of a caning as we would have.
“I’m sure the directors of various institutions looking back now wish they had a different policy in regard to lending, but that’s hindsight, you know, and we’re all brilliant in hindsight.”
Smurfit says there was huge competition among banks to lend into the property sector.
“Two-and-a-half years ago, they were shovelling money at you. The world was awash with cash. Two- and-a-half years later, there’s not a penny to be found.”
Smurfit says he was not an investor in Anglo Irish Bank, whose former chairman, Seán FitzPatrick, succeeded him in the chair at Smurfit Kappa.
FitzPatrick resigned from Smurfit Kappa last December when he left Anglo over the concealment of his directors’ loans.
As a Monaco resident, what does Smurfit say to those who say the Government should do more to tax super-wealthy tax exiles as part of efforts to correct the public finances? “I don’t think you can stop people in a free society from living where they live. That’s fundamental,” he says.
When pressed on the matter, he says there is “no point in discussing it because it’s bound up by treaties and by different dual taxation arrangements we have with numerous other countries”.
“Whatever money I earn in Ireland, I do pay my taxes on it,” he adds. “I’m paying the taxes anybody else is paying on all my income arising in Ireland. And in America I pay all my income tax that derives in America. It’s not that I don’t pay any taxes.”
Smurfit has been on the board of property company Ballymore holdings, led by developer Seán Mulryan, since late 2005. “When I joined the board of Ballymore . . . it was the first thing I told him. I said there’ll be a huge correction, we’ve got to prepare for it.”
What did Mulryan say when Smurfit said that? “He agreed – and did take as much corrective action as we could. As I’ve always said, the upside will look after itself, it’s the downside you’ve got to protect.”
So how is Ballymore faring now? “Well, it’s a private business, but, along with all property companies, it’s suffering like everybody else is. Values have been reduced. But [Mulryan’s] got some great assets overseas. He’s not just an Irish developer, he’s an international property developer.”
Smurfit does not read Irish newspapers every day any more. Although he visits here about once a month, he says he is not close enough to the scene to truly gauge the Government’s response to the crisis. But does he sense from what he does know that Taoiseach Brian Cowen and his colleagues are going about it the right way? “I think yes that probably on balance I do,” he says.
“First and foremost I think the response by the Government in terms of the banks was a no-brainer, that they had to do that. I don’t there was any options.
“I think the same applies in the US, except I believe that history will probably record that letting Lehman Brothers go was one of the great disaster events of all time. That is really the one: the world was in a spin, but that really put it into a downward spiral. We have yet to find the bottom, that would be my assessment.”
Some critics say the Government would be better off nationalising the two big banks than setting up the National Asset Management Agency (Nama). Does he agree?
“That’s an option I think they still retain,” he says. “The actual Swedish model, which I think they’re going on, worked very well in Sweden and in fact that agency ended up making a profit on the property they got from the banks.”
Smurfit sees the current crisis in a historical and international context. “We’ve had 600 years of domination by Britain. We’ve had Famine. We’ve had mass emigration. We had a Civil War. We’ve had the lost ’20s, ’30s, ’40s and ’50s,” he says.
“We’ve have a fantastic innings, if you will, in the last 15 years or so, and Ireland would not be in the same situation it is today if the world hadn’t have gone [into decline]. There was always going to be a correction. There was always going to be a serious correction in property values. That was a given. The question was how quickly.”
Asked about international perceptions of Ireland, he says people were envious of the Celtic Tiger. “I wouldn’t say they would be gloating about the demise of it,” he says. “Maybe some people – particularly the British people – would say, ‘well, well, you had it coming’. But then, the British and the Irish have always had their little niggle, you know.”
So how long before the recovery begins? “My guess would be that we’re probably not far away from the bottom. Nothing goes down forever, like nothing goes up forever. The crawlback to respectable levels of valuations, rather than high levels of valuations – it’s going to be some time.
“It’s going to be in the years rather than in the months . . . Confidence has been so hurt, that’s the thing that takes time to restore. But it will be restored.”
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