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Strategies & Market Trends : Countries

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From: Sam Citron2/23/2009 9:26:58 AM
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Irish Mogul's Empire Totters As Slump Tames Celtic Tiger [WSJ]


DUBLIN -- Sir Anthony O'Reilly long has been a symbol of Irish resurgence, a national rugby hero and raconteur who conquered the U.S. corporate world before returning home to oversee a sprawling business empire. That empire now shows signs of unraveling.

Sir Anthony, once America's highest-paid chief executive while leading H.J. Heinz & Co., has seen the value of his holding in his Dublin-based global newspaper group, Independent News & Media PLC, plunge to $52 million from more than $1.1 billion just 18 months ago.

Concerns about a €200 million ($253 million) debt payment that Independent News faces in May have sent its shares down 90% over the past year to 18 European cents -- less than the price of most of its newspapers. Facing declining advertising and readership in addition to its debt load, say analysts, the company could be forced into a fire sale of assets that could cost the firm its trophy publication: the London-based Independent.

In another corner of the O'Reilly world, Waterford Wedgwood PLC, the historic maker of fine china and crystal controlled by Sir Anthony and his brother-in-law, is in the equivalent of bankruptcy reorganization, and workers are occupying a shuttered factory. U.S. private-equity investor KPS Capital Partners LP is negotiating a possible purchase of the company that could be announced within days, according to a person familiar with the situation.

Sir Anthony is an example of how, for some business titans, the credit crunch and recession have become a brutal multifront assault. His big bets on newspapers, luxury goods and the remaking of Ireland itself made him the richest man in the country. Now each of those areas has boomeranged on him.

Mr. O'Reilly, 72 years old, sounds pessimistic about his prospects and Ireland's, saying in a recent interview that the Irish economy will be "lucky" to contract just 4% this year and that there is little the country can do about it. "It is impossible that if Ireland does not do well, that any of us can do well," he said.

The drama also finds Sir Anthony fending off a business nemesis, Irish industrialist Denis O'Brien. Sir Anthony owns 27.9% of Independent News & Media. Mr. O'Brien has acquired a 26.2% stake and is pressing for changes, in a move that could disrupt the possibility of Mr. O'Reilly's being succeeded by his son, Gavin.

At Waterford Wedgwood, a sale to a foreign buyer such as KPS Capital would be another blow to Sir Anthony, who was deeply proud that he helped turn the 250-year-old Irish company into a global brand. KPS has acknowledged discussing a possible purchase of Waterford Wedgwood but wouldn't comment further.

Sir Anthony's problems are unfolding against a backdrop of Ireland's severe downturn following a decade of boom. In the 1990s, the country's low corporate taxes, business-friendly governments and English-speaking work force attracted huge amounts of foreign investment, driving up incomes and property prices. The global recession reversed the flow, puncturing the property boom and hammering major banks. The Irish economy is now one of the sickest in Europe.

The problems are a rude comedown for Sir Anthony, whose stint as Heinz CEO from 1979 to 1998 turned a sleepy Pittsburgh company into a food dynamo. He is unhappy with criticisms that he took on too much debt in his Irish business. It's not his companies that have changed, he says, but the world. "If the debt of a company has not gone up in three years, was it an over-indebted company three years ago or is it an over-indebted company now?" he asks.

Criticism of his businesses is a far cry from the plaudits Sir Anthony grew accustomed to over the past 40 years. He rose to prominence as a rugby player for Ireland and a combined British-Irish team. He set scoring records that in some cases still stand, became an international celebrity and dated beautiful women. One common story: that his athletic frame led to a request that he audition for the lead in the 1959 movie "Ben Hur." A biography written with his cooperation says "he rather encouraged this distortion of the truth" but was never in serious contention for the role.

While continuing to play rugby, he became, at 26, chief executive of the Irish Dairy Board, fueling a butter export boom by launching a new brand called "Kerrygold." He says he was urged to go into politics by an Irish prime minister and believes he had a chance of becoming prime minister. "I would have been in contention," Sir Anthony says.

Instead, he became the head of Heinz's British unit at age 32, and within 10 years was CEO of the parent company. In 1991, he earned $75 million in combined salary, bonus and stock options, more than any other CEO in the U.S. that year.

While rising through Heinz, he bought a controlling stake in Dublin's Irish Independent, a leading morning paper. It was the start of many investments in Ireland's leading companies, and part of a mission by Sir Anthony to introduce modern management, finance and marketing techniques to Ireland.

Sir Anthony -- he was knighted in 2001 -- turned Independent News & Media into Ireland's first international media company. In the decade leading up to 2007, its revenue rose 75% to €1.4 billion and operating profit more than doubled to €349 million, as the company bought newspapers and advertising businesses in India, Indonesia, South Africa and the U.K. In doing so, Independent News & Media took on €1.4 billion in debt, including about €500 million on its partly owned Australian unit.

The company also attracted the attention of Mr. O'Brien, who had made his fortune in telecommunications. As the two competed for Irish phone company Eircom PLC in 2001, Sir Anthony's newspapers, along with others, reported that Mr. O'Brien was being investigated by a judicial commission for giving money to a government official who awarded him a cellphone license. Mr. O'Brien denied doing anything wrong. The commission hasn't released its findings.

In 2006, Mr. O'Brien bought a stake in Independent News & Media and quickly built it up to the current level not far below Sir Anthony's own stake. At the company's annual meetings over the next three years, Mr. O'Brien's sharp criticisms of Sir Anthony's management and corporate governance -- posed by proxies, not by Mr. O'Brien himself -- became a regular feature.

Last March, Independent News & Media responded by publicly accusing Mr. O'Brien of trying to destabilize the company and damaging the interests of other shareholders. The company released a five-year-old letter from Mr. O'Brien accusing Independent News of "trying to destroy my reputation." Mr. O'Brien wrote he was "waiting for the appropriate time to rectify the damage."

Mr. O'Brien declined to comment on the letter or any feud with Sir Anthony, who for his part said there were no hostilities between the company and any of its shareholders.

When the economic crisis kicked into high gear last fall, Sir Anthony found himself in an increasingly defensive position, as investors grew concerned about Independent News's ability to meet its debt obligations.

Sir Anthony began to search for allies. He tried to interest News Corp., owner of The Wall Street Journal, in taking a 3% or 4% stake, according to a person familiar with the matter. News Corp. Chairman and Chief Executive Rupert Murdoch nixed the idea.

A spokesman for Sir Anthony denied there was any approach to News Corp. A spokeswoman for News Corp. declined to comment.

One person who did make an investment was Mexican billionaire Carlos Slim, who now owns 1% of Independent News. Sir Anthony says Mr. Slim is a friend but "there is no suggestion we solicited him." A spokeswoman for Mr. Slim declined to comment.

Sir Anthony tried to raise cash through the sale of one of Independent News's most successful investments, a 39.1% stake in Australian and New Zealand media group APN News & Media Ltd. Lachlan Murdoch, the eldest son of Rupert Murdoch, expressed interest but didn't proceed, say people familiar with the situation. Other buyers couldn't get financing, according to Independent News.

In January, Sir Anthony dropped the idea of selling the stake and said he would raise cash through a bond issue while focusing on "eliminating any loss-making businesses." Among the options: selling the Independent newspaper in London, which would be a concession to Mr. O'Brien, who has complained about the paper's estimated £10 million ($14 million) annual losses.

Independent News is hoping to make peace with Mr. O'Brien, according to board-meeting minutes. In November Mr. O'Brien held his first meeting with the company as a shareholder. With Sir Anthony away on business, Mr. O'Brien, 51, got a tour of a printing plant in south Dublin, accompanied by executives including Sir Anthony's son Gavin, 42, the chief operating officer of Independent News.

Independent News faces significant problems even absent any feud with Mr. O'Brien. The Independent in London lost 14% of its circulation over the past year, and advertising is in the tank.

"If you are in the advertising business, there is no place to hide," Sir Anthony says. "You are in the crossroads of everything that is happening in the country -- of property, of motor cars, of recruitment, of dislocation, of restaurants, of travel."

Sir Anthony has also been hit by changing tastes in luxury goods. In 1990, he and his brother-in-law, Peter Goulandris, and several other investors bought a 29.9% interest in Waterford Wedgwood, one of Ireland's most famous brands.

Sir Anthony figured his marketing expertise and U.S. knowledge could revive the struggling ceramics and crystal maker, and sales indeed improved. In 1996, he described Waterford Wedgwood and his other Irish investments as "perhaps the greatest success story in Irish business in the last decade" in a letter to Irish Prime Minister John Bruton.

But after years of success, sales started to slip during the 2001 U.S. recession. Some consumers found the company's fine bone china old-fashioned and its crystal clunky, say former executives. No matter what Sir Anthony did -- change senior management, close factories, sell products on -- revenue and profits continued to slide. Customers were reluctant to buy expensive china stamped "Made in Indonesia," as some of it was. By the end of 2007, the company's cash levels were so low it couldn't afford to ramp up production over the crucial holiday period.

Sir Anthony and Mr. Goulandris put up an addition €133 million, according to regulatory filings. But the cash didn't come through quickly enough, and the company's big ceramics factory in Stoke-on-Trent, in central England, was unable to make enough cups and plates for Christmas, according to the company's 2008 annual report.

According to Thomas R. Wedgwood, who is a descendant of founder Josiah Wedgwood and worked for the company in Asia, Sir Anthony and his managers didn't market the brand enough in Japan and China, where European tableware is prestigious. "All of the [investment] was going to the U.S." Mr. Wedgwood says. "There was a huge disconnect with the customers."

From a €68 million profit in 2000, Waterford Wedgwood swung to a €231 million loss in the year ended last April 5. Between its business problems and the credit crunch, it didn't have enough money to make a €400 million payment in December.

The default, together with other violations of the company's debt agreements, allowed creditors to demand their money back immediately. Sir Anthony looked for a buyer. He couldn't find one.

On Jan. 5, Deloitte LLP was appointed to place Waterford Wedgwood in administration, a form of bankruptcy proceedings. Sir Anthony declined to comment on Waterford Wedgwood's problems; Mr. Goulandris couldn't be reached. The men have lost an estimated €400 million.

At the company's closed Waterford factory in southern Ireland, about 200 employees have occupied part of the plant since the company to a large extent stopped operating, and say they will stay until the company is sold. They have taken turns tending the factory's furnace, fearing it will crack if its temperature gets too low, according to a spokesman for the Unite union. In addition to KPS Capital Partners, another U.S. private-equity firm, Clarion Capital Partners LLC, has been interested in buying the company, according to spokesmen for the funds.

Sir Anthony remains widely respected in Ireland for his determination, including 29 years as chairman or chief executive of Independent News. "He stayed the course a lot longer than people thought he would," says Gerry Hennigan, an analyst at Goodbody Stockbrokers in Dublin.
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