Wednesday, 18 October 2006
Question 87: To ask the Minister for Finance the role played by his Department in the IPO sale of Aer Lingus shares or in the subsequent sale of 7% of the over-allotted share option; and the role currently played in conjunction with other Departments in making arguments to the European Commission protecting competition in Irish aviation. [33321/06]
As Minister for Finance and a shareholder in the company, my officials and I worked closely on the IPO process with the Minister for Transport and his officials, who have primary responsibility for all aviation policy matters, including the sale of Aer Lingus.
The sale of the over-allotted shares was done under the price stabilisation mechanism generally known as "Greenshoe", a standard feature of IPOs. It was provided for by a formal agreement in mid-September with the underwriters. Under that agreement, the exercise of the Greenshoe was a matter solely for the underwriters in their capacity as managers of the share dealing. On 3 October, they notified my Department formally of their decision to exercise the over-allotment option, which was a technical matter in their hands and did not require permission to proceed.
It was the Government's intention to hold at least 25.1% of Aer Lingus post IPO. We reduced our shareholding of 85% to 28.3% in a staggered process. We hold 28.3% and the ESOT has the option to buy 2.9% of those shares should it want to do so. In any IPO provision is made for the underwriters to over allot shares at a date after the IPO to ensure an orderly market in the shares. This is because shares new to the market have no track record and can fluctuate. The mechanism to feed shares into the market enables investors to have some reassurance that the price will not fluctuate widely in the normal course of events.
In this case the underwriters, using their judgment, announced that they were utilising the over allotment option. This is a technical matter in the hands of the underwriters and they did not require our permission to proceed.
In essence, the underwriting agreement gives the underwriters authority to sell shares on behalf of the Government and Aer Lingus as a part of the IPO process and outlines how the transaction is to be conducted. It was signed on 12 September 2006.
In regard to the making of contact with the European Commission on competition in Irish aviation, this is primarily the responsibility of my colleague the Minister for Transport, given his overall responsibility for aviation policy and competition in that area.
This is a bit of a mess. The fact is that 7% of the over allotted share option that was sold two days after the IPO could have been sold four weeks later. The decision was made by someone. The Minister stated that he was informed by the underwriters. He might confirm whether he had a right to veto that undertaking when it was given to him two days after the initial IPO.
Is it not likely that part of that 7% might have subsequently ended up in the 20% shareholding of Aer Lingus's main competitor, which has built up a shareholding that puts it in a strong position to become not only a majority shareholder, but the eventual owner of Aer Lingus, thus obviating any competition in Irish aviation?
Is it correct that the probable reason the 7% was sold just two days after the IPO is that the share price rose sharply over the original share price of €2.20, which we now know in retrospect was the Government undervaluing Aer Lingus?
The Government stands indicted on several grounds. Not only is there the risk of Aer Lingus falling into the hands of its biggest competitor, despite the Government seeming to depend on the largesse of other people and the Aer Lingus pilots, but there is the possibility of the National Pension Reserve Fund using the State's money to relieve the Government's embarrassment on this issue. Can the Minister explain why the 7% was sold two days afterwards when he had the option, which I presume he maintained, of holding on to those shares for a full 30 days, seeing how the share sale proceeded over that period, and stopping others from accumulating the significant share bloc which they seem to have attained in the meantime?
I am afraid Deputy Boyle is incorrect. The IPO was a success. There have been other IPOs involving reputable companies going to the market which had to be withdrawn. This IPO was a success.
We did not sell 7% of the over allotted share option, as Deputy Boyle stated in his question; we sold 100% of the over allotted share option.
That is just the second point.
The third point is that this is a normal feature of IPOs, where one withholds in a staggered process shares which are in the remit of the underwriters — it is not a question of veto by Government — to ensure that there is an orderly bringing to the market of the stock being purchased. One only holds it in the event that the share price goes under the bid price. One would put those shares out onto the market to support the bid price and to make sure it gets above the share price that was issued. When the share price was above €2.20, there was no need to hold those shares because they were part of the staggered process of an orderly floating of the stock. That is a normal feature of IPOs. There is nothing unusual about it and clearly it worked properly.
The price was obviously set at €2.20 on the strong advice of advisers in order to get the best possible membership of shareholding that would be committed to long-term investment in the company. Quite correctly, as is normal for a successful IPO, there was a 10% premium in the price so that people would go in and buy at that price. There was also the question of ensuring that one had sufficient shareholding floated on the stock market to bring in the sort of institutional investors who would take a long-term view of their shareholding and not take a speculative shareholding as Deputy Boyle suggests.
One then saw subsequently, with the intention of Mr. O'Leary to bid, a monopoly premium going into the price, speculating on the proposed bid that he has yet to formally make. Once he makes that bid, he has 45 days in which to acquire the stock.
The issue is clear. There was not a botched offer. This was an excellent sale of this stock as a result of management and other advisers getting support for its floatation internationally. The over allotment of shares is part of a staggered process, which is a normal feature of IPOs. It is only held and released in the event of the bid price going under the initial share price. That was not the case and therefore there was no need to hold onto that stock. That is the situation. It is explicable for anyone who has an acquaintance with the IPO as an offering.
I wonder what is the Minister's definition of success. If a successful IPO is managing to sell all the shares that are on offer, it is a limited definition of success. Success must be judged on whether the shares were sold at the right price. They were not sold at the right price.
Success must be judged on whether the Government maintained whatever leverage it had remaining, and it did not. Did the Minister have a veto on this 7% being sold within two days? If he is indicating he did not, I accept it.
If a 30-day period exists for holding on to such leverage in any IPO, why in this particular IPO were the shares sold within two days of the original IPO? I do not accept that is standard in any IPO process. There is something unusual about this particular process that these shares were off-loaded so quickly.
The Minister did not answer other questions I asked in my original question. The Government now seems to be dependent on third persons, and Aer Lingus pilots, to stop any likely takeover of Aer Lingus, but what about the possibility that the National Pension Reserve Fund is investigating whether it can invest in Aer Lingus? This, in itself, would be the ultimate irony, that funds of the State would be used to acquire what the State owned only a short few weeks ago.
Aer Lingus must have access to capital markets to compete on a level playing field with all of the successful carriers, even Continental Airlines, in Europe. We decided to hold 25.1% at a minimum so that we could have that minority holding to allow us to continue to play some role in the development of the company and to ensure the future of the Heathrow slots. The slots cannot be disposed of without a change in the articles of association, which a shareholding of 25.1% can prevent. In addition, under these articles the Minister for Finance's shareholding, along with an additional 4.8% of shares, can block any disposal of a London Heathrow slot. The Government's policy on the IPO was set out in the principles of the sale of Aer Lingus which were approved by the House in June last. That is the answer to that question.
On the next question, we cannot act in consort with anybody on this matter. Stock Exchange rules apply in this regard.
On the National Pension Reserve Fund, I would not comment on whether there is any truth in that suggestion. They would not confer with me in that matter. The National Pension Reserve Fund is statutorily independent in relation to its own investment decisions.
In the past many, including possibly Deputy Boyle, have asked, on the Finance Bill and at other times when the affairs of the NTMA and these sorts of agencies are considered, why such agencies do not invest more in Irish stocks. That would be a matter for themselves. Deputy Boyle cannot come in here and contradict himself. Those are independent investment decisions.
It is an excellent pension reserve fund. As Deputy Boyle will be aware, as of March last it had a total value of €16.6 billion, which thankfully cannot be touched by anybody in Government until 2025 because we want to ensure that there is sufficient provision for future pensioners at that stage.
Deputy Boyle cannot have it every way. The position is that he either agrees or disagrees that this company is entitled to get out there and develop, to get access to markets to which its competitors get access, and to implement its plan which is about doubling its long-haul fleet. As a result of the floatation, the company has over €430 million in its bank account that it did not have previously. In addition, it has been forgotten that the legacy issues relating to the pension fund deficit have been dealt with via a contribution of €106 million, which gives greater security to employees and future pensioners. We should be talking about getting on with the development strategy for Aer Lingus. Some people have become totally bedazzled because Mr. O'Leary indicated he wanted to make a bid. There are many obstacles to the successful launch of such a bid, yet there is an attitude that because he has indicated that intention, we should all throw up our hands. Let us get on with the business and ensure——
This is a policy, not a personality issue, about maintaining a competitive aviation sector in Ireland with a strong Aer Lingus and a strong Ryanair. In the past when Ryanair was under pressure, Governments of all compositions vacated slots and, quite rightly, supported competition in the marketplace with all the benefits accruing to consumers and the economy as a result. Let us deal with this in a calm, professional and competent manner and allow Aer Lingus to get on with accessing new markets, doubling its long haul fleet, increasing its short haul fleet by 50% and attracting more passengers. I am sure Ryanair will continue with its strategy. Institutions that have invested in Ryanair have questioned how its interest in Aer Lingus fits the strategy of a low cost carrier. Let us wait and see how this develops. The notion that this is an inevitable done deal is totally untrue and at variance with the facts.