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"I come from Ireland and I've seen the damage of religious warfare. I am a believer. I don't wear the badge on the outside but it is on the inside." — Bono

Out of Control

Supergroup U2 are caught in the crossfire as their high-profile advisers Paul McGuinness and Ossie Kilkenny...
The Sunday Times
Supergroup U2 are caught in the crossfire as their high-profile advisers Paul McGuinness and Ossie Kilkenny, who have guided the multi-million-pound band for 20 years, go through a messy divorce. John Burns reports.

"They are like a couple splitting up after 20 years, and now they are fighting over the kids," said an associate of Paul McGuinness and Ossie Kilkenny last week.

Once, they were the dream couple: McGuinness, shrewd businessman who spotted the raw talent of U2 in the 1970s and helped transform four Dublin schoolboys into the most successful rock group of the 1980s; Kilkenny, the whiz-kid accountant who took care of the band's money, and that of Oasis, the Verve, Van Morrison and Bjork.

Some sources say their relationship has become frosty. Others hint that the furniture is flying, and the republic's best-known business partnership could end up in the courts. For the moment, there is just a media briefing battle. Favourable profiles of Kilkenny have cropped up in two newspapers, with admiring quotes from associates. Stories suggesting that the accountant is splitting from U2 have appeared in two others.

The band -- Bono, the Edge, Adam Clayton and Larry Mullen Jr. -- is sticking with McGuinness. Sources close to them say they are disappointed with the investment of their funds and are dismayed at the breakdown in the band's relationship with Kilkenny. Clean-living and conscientious, U2 have always steered clear of controversy. Now they could get caught in the crossfire of a messy divorce.

The story goes that U2 started out on 25 pounds a week plus expenses. Their bus fares supposedly came from a jar of coins sitting on McGuinness's desk. With the huge success of their 1979 debut album, Boy, the band quickly became a multi-million-pound concern.

In the early 1980s, McGuinness invited Kilkenny to audit U2's companies and his own personal interests. Kilkenny soon became more than an auditor, and provided investment and business advice to the band.

McGuinness's company, Principle Management (so called because McGuinness was determined to be more principled than other managers), was employed by U2 on a commission basis. Kilkenny audited its accounts, too.

The arrangement worked well until the early 1990s when an investment the two men made in LeisureCorp began to go disastrously wrong. In 1987, LeisureCorp bought out Pot Black, an arcade owner, and spent about 20m pounds on several prime sites around Dublin. It also bought rights to Quasar, a laser-gun game. The plan was to build four leisure complexes -- in Dundrum, Rathmines, Dun Laoghaire and Malahide Road -- featuring tenpin bowling and Quasar. An investment of 22m pounds was planned, financed by the directors and bank borrowings. Everything stalled when the Irish government changed the rules for the Business Expansion Scheme in the early 1990s.

LeisureCorp's activities in Germany were a fiasco. It spent 8m pounds on six sites for leisure centres, only to discover war games with replica guns were banned in Germany.

By 1993, U2 had had enough and bailed out. Pre-boom, LeisureCorp sold off its properties at a net loss. They included the magnificent Pavilion cinema site overlooking the seafront in Dun Laoghaire, that was sold to Monarch Properties, which is now building an apartment block there.

Kilkenny remained as a non-executive director of LeisureCorp, which later sold its rights to the Quasar game to an American company, Q-Zar. That venture also ended unhappily. When Q-Zar collapsed last year, LeisureCorp was left at least $1m (700,000 pounds) short on the deal. "LeisureCorp was not a good or happy investment," said one source close to the band.

U2 management's unease grew in 1994 after a spate of newspaper reports stated that liabilities exceeded assets in two of its companies, Not Us Limited and Mother Records. This was only a cosmetic problem, but the publicity was unwelcome. In 1995 the companies Registration Office wrote to five U2 businesses demanding they bring files up to date. If they did not comply, summonses would be issued. The accounts were filed just in time.

A source close to the band said: "These exposures really embarrassed them. They wanted those basic things done right. At that point they started wondering about other issues. This created a lot of doubt in their minds."

In September 1996, McGuinness reacted to the unease by introducing Trevor Bowen, a former senior partner in the KPMG accountancy practice, as financial director of Principle Management. Kilkenny was replaced as company auditor by KPMG. Bowen began detailed analysis of U2's finances.

"Immediately the picture became a lot clearer," said the source. "Bowen looked at the series of investments made for the band and you could say none of them had performed particularly well. If the money had been put into Allied Irish Bank shares over a 10-year period instead, they would have had a better return.

"Bowen brought more accountability and discipline to the proceedings. Up until then U2 had not bothered to ask for information. Now they asked themselves if they had as much money as they should. An element of disappointment crept into their relationship with Kilkenny."

Not even the Clarence hotel in Dublin, supposed jewel in the crown of U2 investments, has been a money-spinner. A management source said: "It is not making a huge profit, although it does not make losses either. Essentially, it needs 20 extra rooms to make it work properly. Steps are being taken to expand it."

Only Bono and the Edge, along with Harry Crosbie, the owner of the Point Depot, are still involved with the Clarence. A music industry source said: "It was the first time that the band split over an investment. McGuinness was not involved at all. The Clarence has eventually worked, but thanks to a lot of courage on Bono's part particularly."

Such narrow squeaks do not sit well with a supergroup that sells about 8m records a year, generating $120m (86m pounds) earnings. But, management sources say, there are virtually no extra-musical earnings and little return on investments.

One source said: "They are certainly not broke but they are not as rich as they might be. If you look back at the earnings of the past 20 years and ask, what do they have to show for it? Nice houses and that's about it."

The quartet and McGuinness discussed the situation in depth when they toured the world with PopMart last year. "They had a lot of time to think about things and they agreed to draw up a new plan for the next seven years," said a management source. "The decision was taken to replace Ossie as the band's negotiator with someone else. His firm would still act as advisers to U2 and auditors to their companies, but the deal-making role was gone."

According to friends of McGuinness, Kilkenny did not react well to this and there was a row. They accuse Kilkenny of attempting to wrest control of U2 and cite his role in Clannad, which could be examined in the High Court later this year when David Kavanagh, its former manager, sues the band.

One music industry source claims: "Ossie used his U2 power base to establish himself in the music business. Paul brought him in and helped build up his career. Paul says he has been slapped in the face and claims Ossie undermined him."

The source said Kilkenny's enthusiasm earned him enemies: "He always seems to see himself as being as good as any band manager. Ossie is the kind of man who would do all the jobs, including the lead singer if he had the time."

A U2 source took a harder line: "It's an ego thing. He is a control freak. He wants to take over; he wants to be the manager."

Despite the complaints from people sympathetic to McGuinness, there is no evidence that Kilkenny has done anything wrong or improper in his dealings with U2 or any other band. Music industry sources say the rift between him and McGuinness could be sorted out if Kilkenny would agree to play a lesser role in U2's affairs.

Kilkenny's supporters point out that he is still involved in a number of investments not only with McGuinness (TV3 and Ardmore Studios) but with members of the band. Mullen Jr. and Clayton have invested with Kilkenny in the Planet Hollywood chains in Dublin and London. The accountant's supporters also point out that Kilkenny alone was not responsible for LeisureCorp's failure. "The reality is that Paul and Ossie were investors in that together," one associate said.

Another music-industry veteran said: "If you have a direct relationship with Bono, which was allowed to happen from early days, you find it very testing to have your word questioned by a manager. In this case, the manager has made his own mistakes in the past. It is a cacophony of people making mistakes."

Kilkenny is no business slouch. His investment in the Seattle Coffee Company, a chain of upmarket espresso bars, has paid rich dividends after its 50m pounds acquisition by Starbucks. Kilkenny is believed to have made 4m pounds. He is also chairman of Nua, a fast-growing Internet consultancy in Dublin.

Chris O'Donnell, manager of Hothouse Flowers, which is "happily" represented by Kilkenny, points out that the accountant still has many friends in the rock business. "It's not just U2," he said. "Every major band has fallen out with their accountants over the years."

That may be so, but nobody ever thought that would happen to U2.

© 1998 Times Newspapers Limited. All rights reserved.