Shareholders in Kerry Co-op are seeking clarity from stockbroking firm, Davy, over how it operated the grey market for trading Kerry Co-op shares over recent years.
Speaking to the Irish Farmers Journal this week, one Kerry Co-op shareholder, who does not wished to be named, said he sold almost 900 Kerry Co-op shares in 2019 via the grey market operated by Davy.
However, the shareholder says he now has concerns of whether it was possible the shares were purchased by Davy itself, while also acting as the broker in the grey market.
The concerns were raised following the recent €4.1m fine imposed on Davy stockbrokers by the Central Bank of Ireland for breaking conflict of interest rules in the purchase of bonds in Anglo Irish Bank.
The shareholder says he wants answers from Davy
The Kerry shareholder said he contacted Davy this week to seek clarity on who purchased his shares in the grey market transaction in 2019 but was given no answers by the firm.
The shareholder says he wants answers from Davy over whether it’s possible it may have acted as both the broker and the buyer for his Kerry Co-op shares. Davy announced on Tuesday that it has appointed US financial services firm Alvarez & Marsal to conduct an independent review of all staff trading at Davy between 2014 and 2021.
The grey market for Kerry Co-op has been in existence for decades and all share transfers must be signed off by the board of Kerry Co-op.
Kerry Co-op shares first became attractive to outside investors after Kerry Group plc floated on the Irish stock exchange in 1986.
The earliest investors in Kerry Co-op shares were local professionals such as accountants, bank managers, solicitors, etc, who could see the value in owning the shares
As Kerry Co-op reduced its shareholding in Kerry Group plc over the years it would “spin out” some of its Kerry Group shares to its shareholders.
Between 1993 and 2013, there were seven share spin-outs where Kerry Co-op shareholders received shares in Kerry Group plc. The grey market for Kerry Co-op shares grew on the back of these share spin-out events.
The earliest investors in Kerry Co-op shares were local professionals such as accountants, bank managers, solicitors, etc, who could see the value in owning the shares.
For most of its existence, the volume of Kerry Co-op shares traded via the grey market was small and relatively steady.
However, the introduction of the share redemption scheme in 2019 appears to have triggered a step change in the volume of Kerry Co-op shares traded on the grey market, which is precisely the time Davy stockbrokers first began to take a serious interest in the shares.
It’s understood the volume of shares traded on the grey market over the last two years has more than doubled with Davy now acting as the broker in the majority of share transfers.
Prior to 2019, the firm took very little interest in Kerry Co-op shares with most Kerry shareholders looking to sell their shares doing so via local agents.
Kerry Co-op’s share redemption scheme proved to be very popular with private pension funds
Once the share redemption scheme was introduced, Davy actively sought out Kerry Co-op shares wherever it could find them. The firm held information meetings in Co Kerry and issued a circular note to prospective sellers.
Kerry Co-op’s share redemption scheme proved to be very popular with private pension funds as there is no requirement for these entities to pay tax on the gains made from selling Kerry Co-op shares.
Figures obtained by the Irish Farmers Journal show pension buyers snapped up 75% of all the Kerry Co-op shares traded on the grey market in 2019. In previous years, pension buyers accounted for less than 10% of grey market transactions.
In one example, pension buyers paid just over €1.8m to purchase almost 5,000 Kerry Co-op shares. Assuming these shares were redeemed via the share redemption scheme, these pension buyers would have received in the region of €3.3m back from the scheme, which is a profit of €1.5m. That equates to a return on their original investment of more than 80%.
Given the recent events at Davy, as well as the obvious profiteering by private pension investors, is it time for the board of Kerry Co-op to suspend all grey market trading of co-op shares and press pause on the upcoming share redemption window in May?
It would seem like the prudent move until all questions are answered about the grey market for Kerry Co-op shares.