State’s winning wager

OF ALL the investments made in the name of the state during the boom, the 2002 purchase of a controlling stake in a five-year-old stallion, Invincible Spirit, was perhaps the most spectacular.

Its value sky-rocketed to a reported €43.5 million – up from approximately €1m eight years ago. It has generated millions for the Irish National Stud (INS) annually.

In 2007, American investors tried to wrest the horse from its Kildare home through a hostile takeover yielding a cash injection from Dubai’s ruler that secured his future.

And, unlike other flagship investment vehicles of the last 10 years, its income stream has survived.

Invincible Spirit’s breeding programme will raise more than €6m this year, down from a high of €10m in 2008.

This represents a bonanza for the INS, as the largest shareholder, and its partners in the stallion’s syndicate, which now includes Sheikh Mohammed.

The other shares are held by a number of individual investors including entities involving chairwoman of the INS Chryss O’Reilly, its director Trevor Stewart and the company’s secretary John McStay.

Invincible Spirit’s on-track career was good but not stellar. The six-furlong sprinter won seven races in three years and took home €375,275 before he was retired to stud in 2002.

His winnings were paltry compared to his earning power after his first crop of foals took to the track in 2006.

He sired a record-setting 35 winners that year. His nomination fee, the price paid to have him breed with a mare, soared to €75,000 a go. Invincible Spirit covered 140 mares in 2008. Even though his fee has dropped by €30,000 from this peak, it remains seven-times higher than the average for the other six stallions standing at the INS.

And success literally bred success. A third of his foals from last year sold for more than €100,000, the most expensive was bought for €375,000. Some of his earlier progeny are already retired from excellent racing careers to command impressive stud fees. Meanwhile, the state retains a 36% share in this unique stallion through the small syndicate the INS manages.

A production line of winners from Invincible Spirit, along with the investment interest this has attracted, proved lucrative for the entire syndicate. It means this horse now represents a high-point in a series of business ventures between the INS and its directors.

It is company policy to encourage Government-appointed directors and those connected with INS to invest in the syndicates it manages.

And when the annual income from Invincible Spirit is distributed among all those in the syndicate, the INS trio are treated the same as other shareholders.

So, in 2007, when there was an additional once-off €15m windfall for the entire syndicate, Ms O’Reilly, Mr Stewart and Mr McStay were entitled to share €2.9m of this between them.

This pot came from the investment from Dubai’s ruler Sheikh Mohammed bin Rashid Al Maktoum. The so-called resyndication valued Invincible Spirit at $60m (€44m) and meant the INS’s share- holding was reduced from 46% to 36%. Darley, the Sheikh’s investment vehicle, took up a 25% share.

Private syndicate members had their shares split as it moved from a 45-share operation to a 90-share pool. They emerged with a combined holding of 39%.

Mr McStay, the company secretary, is understood to have held the largest shareholding in Invincible Spirit (four shares) of the three connected parties. Mr Stewart, who was appointed a director in early 2007, owned the least.

A statement from the INS said the windfall occurred because it was not a willing seller when the 2007 hostile takeover was attempted. But it felt it had to react because all other shareholders were being denied a return by its stance.

“The INS, as syndicate manager, canvassed the views of all shareholders. Some shareholders had no desire to sell whereas others reduced their stake in the stallion.

“[The resyndication] was eventually structured on the basis that each shareholder who wished to do so could sell 50% of their holding. The balance of the state sold to Darley came from the holding of the INS,” it said.

In her annual report for 2007, Ms O’Reilly said having the individual shareholders onside made the deal possible.

“I cannot emphasise strongly enough the importance the board placed on the retention of this great stallion in Ireland for the use of Irish and European breeders and, as a testament to this, the individual shareholders in Invincible Spirit, when presented with an offer bringing them each significant potential profits, almost all said they would follow the lead of the Irish National Stud.

“Their loyalty was eventually significantly rewarded and most retained a new share in the stallion,” Ms O’Reilly said.

When the broad details of the deal were made public, the then chief executive of the INS, John Clarke, said it would have been unfair on shareholders not to seek the investment by Darley.

“The reason we brought in a strategic partner for the horse is that a lot of money was available for shareholders. And we felt some might want to sell their shares, and it was wrong to keep telling the shareholders ‘no’,” he said.

The Government-owned stud has repeatedly said it encourages directors and connected parties to do business with it.

This is through training, keeping horses at the stud and getting involved in stallion syndicates managed by the company.

Between 2001 and 2008, the seven-member board sold €640,164 worth of goods or services to the INS. This was helped by two bumper years in the early part of the decade. It was on top of €203,000 paid in directors’ fees during the same period. In addition, the INS has bought €213,720 worth of services from renowned trainer Dermot Weld, who is also a director of the company. These transactions are reported faithfully in the company’s annual accounts.

What is not reported is the portion of transactions related to the stallion syndicates which do not represent an income for the company.

The INS operates a number of syndicates and collects and distributes the fees earned by the stallions.

The fees given to syndicate members flow through the INS for convenience. These stallion syndicates are the significant source of revenue for the INS – with Invincible Spirit the most valuable. Investment in stallion syndicates is not a guarantee of success and depends on the on-track ability of a horse’s progeny.

In the case of Invincible Spirit this was a spectacular success.

Along with the right to share profits, each share also carries breeding rights. This means syndicate members can have one mare a year covered for each share, or sell this access privately.

Breeding from Invincible Spirit has yielded results. Ms O’Reilly’s Petra Bloodstock Agency was named the leading breeder in France after her horse Lawman, the son of Invincible Spirit, won the French Derby.

This horse is currently based at the Ballylinch Stud in Kilkenny and this year will demand a nomination fee of €15,000.

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