Published on May 31st, 2015 | by Jim Lee0
Ryanair’s Shareholding in Aer Lingus
On 28th May, the Dáil voted to accept the Government’s motion on the sale of its 25.11% shareholding to International Airlines Group (IAG). Up to then, all the attention has been focussed on the Government’s shareholding in Aer Lingus. Now the focus turns to the other Shareholders, particularly Ryanair. Ryanair is the largest shareholder in Aer Lingus with 159,231,025 shares or 29.82%. Ryanair’s position has been that the Board of Ryanair would consider any offer from IAG “on its merits, if or when it is received”. IAG published its formal ‘Recommended Cash Offer’ document on 26th May and it can be found here. The IAG offer is conditional, amongst other things, on receiving acceptances (which have not been withdrawn), in respect of Aer Lingus Shares, which represent not less than 90% in nominal value of the Aer Lingus Shares, to which the Offer relates and of the voting rights attaching to those shares. This of course includes the Ryanair shareholding.
Who are the other Aer Lingus shareholders?
While 45.07% or 240,700,039 shares are held by ‘Others’, these are not a distinct group, with none, other than Etihad Airways, with 26,648,600 shares (4.99%), having more than 3% in the share capital of the Company. There are nearly 6,400 shareholder accounts, with 82 of these having over 250,000 shares. These accounts include those held by staff, management and directors, as well as former staff such as Christoph Mueller and even Willie Walsh, who holds 10,616 shares. Originally the staff controlled 15% of Aer Lingus through the ESOT (Employee Share Ownership Trust), and Aer Lingus was required to pay an annual share of profits to the ESOT. In December 2010 Aer Lingus made a once-off cash payment of €25.3 million to ESOT, extinguishing its obligation to pay any further share of profits to the ESOT. Some 66.6 million shares, representing approximately 12.5% of the airline, were distributed to the individual members, some 4,700 current and former employees of the company.
Speaking to the Joint Committee on Transport and Communications on 29th January, Captain Evan Cullen, President of the Irish Air Line Pilots Association (IALPA), confirmed that IALPA own 7% of Aer Lingus. This is divided among a number of investment vehicles, the largest of which is their pension scheme, which currently holds 2.5%. Other shares are held in an investment vehicle called Tailwind, while the rest came from the dissolution of ESOT, and from the internal share options that took place during the 1990s. According to the Forex Academy, the exact breakdown of intuitional investors is unknown, as only holdings of over 3%, have to be disclosed by companies under stock exchange rules. One such investor is the Guernsey based Crystal Amber investment fund, which has a 2.8% shareholding. While Denis O’Brien had an almost 4% stake, in July 2014 he sold 4.7 million shares reducing his stake below the 3% threshold. He subsequently sold off his remaining 2.4% shareholding.
The end of the beginning
While the Governments decision to sell its 25.11% stake and its ratification by the Dáil is significant, the deal, first confirmed ‘as a preliminary highly conditional and non-binding approach’ by the Aer Lingus board on 14th December 2014, it still has to receive regulatory approval. This includes the sanction of the EU, as well as ratification by shareholders at an EGM. As a first step the Offer Document, containing the full terms and conditions of the Offer, will be posted within 28 days to all Aer Lingus shareholders. The EGM circular, (including the notice of the EGM), will be posted to Aer Lingus shareholders when, or shortly after, the Offer Document is posted.
The value of the Ryanair shareholding
While the general perception is that Ryanair had fully written down the value of its shareholding, documents filed with the United States Securities and Exchange Commission on 30th July 2014, (its Form 20-F for the Fiscal Year ended 31st March 2014), show that this is not the case. While the investment had in prior periods been impaired to €0.50 per share, it retains an available-for-sale financial asset balance sheet value of €260.3 million, reflecting the market value as of 31st March 2014, as compared to a value of €221.2 million as of 31st March 2013.
In accordance with the company‘s accounting policy, this investment is held at fair value. It is classified as available-for-sale, rather than as an investment in an associate, because Ryanair does not have the power to exercise any influence over Aer Lingus. The increase in the amount of the available for sale financial asset from €221.2 million at 31st March 2013 to €260.3 million at 31st March 2014 is comprised of a gain of €39.1 million, recognised through other comprehensive income. It also reflects the increase in Aer Lingus’ share price from €1.39 per share to €1.64 per share during that period. All impairment losses are required to be recognised in the income statement for investments in an equity instrument classified for available for sale and are not subsequently reversed, while gains are recognised through other comprehensive income.
Selling this shareholding would be a boost to Ryanair’s finances of around just shy of €138 million, (based on its 159,231,025 shares realising just over €398 million less the book value). It acquired its 29.82% in fiscal years 2007, 2008 and 2009, at a total cost of €407.2 million. It will also receive a cash dividend of €0.05 per Aer Lingus Share (payable on 29th May 2015 to all Aer Lingus Shareholders), amounting to almost €8 million.
“We’re hopeful that Ryanair will see this as an attractive offer for their stake in Aer Lingus,” IAG chief executive Willie Walsh has been reported as saying. However, given these figures, some analysts expect Ryanair to “play hard ball” and although Willie Walsh has said he would not increase the bid. Presumably if Ryanair rejected the offer as too low, the onus would be on IAG to return with a higher bid for all shareholders.
We would really be in unchartered territory if Ryanair’s game plan, was not to accept the offer, and pursue its own bid for Aer Lingus. While not particularly likely, it would be devastating for Aer Lingus. Ryanair has invested considerable efforts in pursuing an acquisition strategy for Aer Lingus, in time, money and legal challenges. Whether it would acquiesce to a major player like IAG consolidating the position of Aer Lingus, a major competitor in its own back yard, is debateable and means that there is still a lot to play for.
A review of Ryanair efforts to acquire Aer Lingus
Following the approval of its shareholders, Ryanair’s management proposed in the 2007 fiscal year to effect a tender offer to acquire the entire share capital of Aer Lingus. This 2006 offer was, however, prohibited by the European Commission on competition grounds in June 2007. The acquisition by Ryanair of Aer Lingus was considered in the context of the overall trend of consolidation among airlines in Europe and Ryanair believed that the acquisition would lead to the formation of one strong Irish airline group able to compete with large carriers such as Lufthansa, Air France/KLM and British Airways/Iberia (now IAG). During the EU competition review, Ryanair made a commitment that if the acquisition was approved, Ryanair would eliminate Aer Lingus’ fuel surcharges and reduce its fares. It claimed that would have resulted in Aer Lingus passengers saving approximately €100 million per year. The European Commission‘s decision to prohibit this offer was the first adverse decision taken in respect of any EU airline merger and the first-ever adverse decision in respect of a proposed merger of two companies with less than 5% of the EU market for their services. Ryanair filed an appeal with the European Court of First Instance (CFI), which was heard in July 2009. On 6th July 2010, the CFI upheld the Commission‘s decision, (for background see here).
In October 2007, the European Commission also reached a formal decision that it would not force Ryanair to sell its shares in Aer Lingus. Aer Lingus appealed this decision before the CFI. This case was heard in July 2009 and on July 6, 2010 the court rejected Aer Lingus’ appeal and confirmed that Ryanair cannot be forced to dispose of its 29.8% stake in Aer Lingus under the European Merger Regulations. However, EU legislation may change in the future to require such a forced disposition. If eventually Ryanair was forced to dispose of its stake in Aer Lingus, Ryanair could suffer significant losses. Also due to the negative impact on market prices of the forced sale of such a significant portion of Aer Lingus’ shares, Aer Lingus and all other shareholders could suffer too.
On 1st December 2008, Ryanair made a new offer at a price of €1.40 per ordinary share. Again Ryanair offered to keep Aer Lingus as a separate company, maintain the Aer Lingus brand, and retain its Heathrow slots and connectivity. Ryanair also proposed to double the Aer Lingus’ short-haul fleet from 33 to 66 aircraft and to create 1,000 associated new jobs over a five-year period. If the offer had been accepted, the Irish government would have received around €180 million compared to over €335 million which will accrue from the IAG offer.
Nevertheless, the offer of €1.40 per share represented a premium of approximately 25% over the closing price of €1.12 for Aer Lingus shares on 28th November 2008. With Ryanair unable to secure shareholder support, it decided on 28th January 2009 to withdraw its offer for Aer Lingus.
The intervention of the UK’s Office of Fair Trading
In September 2010, the United Kingdom‘s Office of Fair Trading (OFT), wrote to Ryanair, advising that it intended to investigate Ryanair‘s minority stake in Aer Lingus. Ryanair objected on the basis that the OFT‘s investigation was time-barred. It contended that the OFT had the opportunity, to investigate Ryanair‘s minority stake, within four months of the European Commission‘s June 2007 decision (prohibiting Ryanair‘s takeover of Aer Lingus). The OFT agreed in October 2010 to suspend its investigation pending the outcome of Ryanair‘s appeal against its decision that its investigation was within time.
On 28th July 2011, the Competition Appeal Tribunal (CAT), ruled that the OFT investigation was not time barred. Ryanair subsequently appealed the CAT‘s decision and on 24th November 2011, the UK Court of Appeal ordered a stay of the OFT‘s investigation pending the Courts review of whether the OFT‘s investigation was indeed time barred. On 22nd May 2012, the UK Court of Appeal found that the OFT was not time barred. This led to Ryanair subsequently seeking permission to appeal that ruling to the UK Supreme Court, but permission was refused.
On 15th June 2012, the OFT referred the investigation of Ryanair‘s minority stake in Aer Lingus to the UK Competition Commission (UKCC). On 28th August 2013, the UKCC issued its final decision in which it stated that Ryanair‘s shareholding, gave it the ability to exercise material influence over Aer Lingus and had led, or may be expected to lead, to a substantial lessening of competition in the markets, for air passenger services, between Great Britain and Ireland. As a result of its findings, the UKCC ordered Ryanair to reduce its shareholding in Aer Lingus to below 5% of Aer Lingus’ issued ordinary shares.
Ryanair appealed the UKCC‘s final decision to the CAT on 23rd September 2013. The CAT rejected Ryanair‘s appeal on 7th March 2014, but granted Ryanair permission to appeal its judgment to the UK Court of Appeal. However, on 23rd April 2014. Ryanair’s appeal to the UK Court of Appeal was rejected and on 12th February 2015 the court also refused permission for Ryanair to appeal to the Supreme Court. Ryanair applied to the Supreme Court for permission to appeal to that court. Separately, Ryanair filed an application with the UK Competition and Markets Authority (CMA), requesting that it considers whether, there has been a material change of circumstances, since the final report in view of the proposed offer by IAG. Ryanair believes that the enforcement of the UKCC decision should be delayed until the outcome of Ryanair‘s appeal against the European Commission‘s February 2013 prohibition decision and decisions in the UK courts, are determined.
Ryanair make a third offer to acquire Aer Lingus
On 19th June 2012, Ryanair made a third offer to acquire Aer Lingus at a price of €1.30 per ordinary share. The timing of the offer was influenced by:
- the continued consolidation of European airlines, and more recently the IAG takeover of British Midland International, (BMI) where the No. 1 airline at Heathrow (British Airways, a member of IAG) was allowed to acquire the No. 2;
- the additional capacity available at Dublin airport following the opening of Terminal 2 and the decline in traffic from 23.3 million passengers per annum in 2007 to 18.7 million in 2011, had resulted in Dublin airport operating at approximately 50% capacity;
- the change in the Irish government policy since 2006 in that the Irish government indicated that it had decided to sell its stake in Aer Lingus;
- the fact that under the terms of the bailout agreement provided by the European Commission, European Central Bank and the International Monetary Fund to Ireland, the Irish government committed to sell its stake in Aer Lingus;
- the fact that the ESOT (Employee Share Ownership Trust), which at the time of the unsuccessful 2006 offer controlled 15% of Aer Lingus, had been disbanded in December 2010 and the shares distributed to the individual members, with the result that Ryanair‘s new offer was, in Ryanair‘s view, capable of reaching over 50% acceptance either with or without government acceptance; and
- the fact that Etihad, an Abu Dhabi based airline, had recently acquired a 3% stake in Aer Lingus and had expressed an interest in buying the government‘s 25% stake in Aer Lingus (the offer therefore provided Etihad or any other potential bidder the opportunity to purchase the government‘s stake).
Again Ryanair offered to keep Aer Lingus as a separate company, maintain the Aer Lingus brand, and to grow its traffic from 9.5 million to over 14.5 million passengers over a five year period, post acquisition. This would be achieved by growing Aer Lingus’ short haul traffic at some of Europe‘s major airports, where Aer Lingus operated, but Ryanair did not. Ryanair also intended to increase Aer Lingus’ transatlantic traffic from Ireland, by investing in its operations. The offer of €1.30 per share represented a premium of approximately 38% over the closing price of €0.94 for Aer Lingus shares, as of 19th June 2012. The offer was conditional on competition approval by the European Commission. However, on 27th February 2013, the European Commission prohibited the acquisition and Ryanair appealed this prohibition to the EU General Court on 8th May 2013. A judgment in this appeal is expected in 2015.
Does Ryanair exercise control, or exercise a significant influence over Aer Lingus?
Ryanair is at pains to point out that it does not have control, or even exercise a significant influence, over Aer Lingus, through its shareholding. Its contention has been based on the following factors:
(i) Ryanair does not have any representation on the Aer Lingus Board of Directors; nor does it have a right to appoint a director;
(ii) Ryanair does not participate in Aer Lingus policy-making decisions; nor does it have a right to participate in such policy-making decisions;
(iii) There are no material transactions between Ryanair and Aer Lingus, there is no interchange of personnel between the two companies and there is no sharing of technical information between the companies;
(iv) Aer Lingus and its significant shareholder (the Irish government: 25.1%) have historically openly opposed Ryanair‘s investment or participation in the company;
(v) In 2007, 2009 and 2010, Aer Lingus refused Ryanair‘s attempt to assert its statutory right to requisition a general meeting (a legal right of any 5% shareholder under Irish law);
(vi) On 15th April 2011, the High Court in Dublin ruled that Aer Lingus was not obliged to accede to Ryanair‘s request that two additional resolutions (on the payment of a dividend and on payments to pension schemes) be put to vote at Aer Lingus‘ annual general meeting; and
(vii) The European Commission has formally found that Ryanair‘s shareholding in Aer Lingus does not grant Ryanair – de jure or de facto control of Aer Lingus and that – Ryanair‘s rights as a minority shareholder…are associated exclusively to rights related to the protection of minority shareholders(Commission Decision Case No. COMP/M.4439 dated 11th October 2007). The Commission‘s finding has been confirmed by the European Union’s General Court which issued a decision on 6th July 2010 that the European Commission was justified to use the required legal and factual standard in its refusal to order Ryanair to divest its minority shareholding in Aer Lingus and that, as part of that decision, Ryanair‘s shareholding did not confer control of Aer Lingus (Judgment of the General Court (Third Chamber) Case No. T-411/07 dated 6th July 2010).
While Ryanair’s hand would have obviously strengthened had the Government decided to refuse the IAG offer, (the only bid apart from its own), it will be interesting to see how the IAG offer will play out in the European Commission, particularly in the unlikely event of Ryanair winning its appeal to the EU General Court lodged on 8th May 2013.