Friday 27 April 2018

The national interest Vs business interest at Aer Lingus

THE WALSH GANG: Willie Walsh of IAG, flanked by Finbarr Griffin of Goodbody Corporate and IAG’s PR guru Laura Goodes
THE WALSH GANG: Willie Walsh of IAG, flanked by Finbarr Griffin of Goodbody Corporate and IAG’s PR guru Laura Goodes

Dan Ennis

Having advised on the IPO of Aer Lingus back in 2006 I am observing with interest the current situation in relation to the IAG approach.

Aer Lingus has gone through significant change over the past seven years post its floatation. It has been profitable and maintained a strong balance sheet during the most severe economic downturn in the history of the Irish state and a very challenging period for the wider Eurozone. This reflects well on the management and board during this period.

The rationale for the IPO was to adequately capitalise the airline to allow it to expand its fleet and provide financial stability to withstand the challenges of being a capital intensive business operating in a highly cyclical sector. This has been important for the long term stability of the company.

Although a lot has changed since the IPO, some things remain the same. The issue of connectivity and the national interest has once again come to the fore.

The protections put in place at the time of the IPO in relation to the disposal of the Heathrow slots are now front and central. The Aer Lingus board has strongly supported the IAG approach, suggesting they are satisfied with the financial terms on offer.

We are now in the realms of politics and what constitutes the national interest rather than share price negotiations.

The concerns re connectivity have some foundation. IAG has recognised this concern and has offered to provide commitments over the ownership and usage of the Heathrow slots for a period of up to five years. IAG would argue that this offers more protection than is there currently.

IAG also argue that they will grow Aer Lingus and create additional employment and connectivity as it is integrated with IAG's vast global network. This could indeed be the case. However it would be the profitability and scale of commercial opportunities within Aer Lingus in the context of a much larger group that would determine IAG's decisions in the medium to long term.

The Aer Lingus shareholder register is further concentrated by Ryanair's 29.9pc shareholding. The status of Ryanair's current shareholding is subject to UK anti competition court proceedings. The UK court of Appeal recently rejected Ryanair's attempt to protect its stake.

Ryanair has vowed to take further legal action on this decision. If Ryanair is unsuccessful it may be forced to reduce its current stake from 29.9pc to 5pc.

The status of IAG's offer is likely to become clearer in advance of a final court ruling re the Ryanair stake. Ryanair have responded to the IAG offer by saying its board would 'consider any offer on its merits'.

The fate of IAG's approach would now appear to be in the hands of the government. However it should be noted that IAG has not made a formal offer at this stage and still has flexibility to tailor the preconditions attaching to an offer.

Although the current approach is conditional on acceptances from the government and Ryanair, in theory, IAG could offer to acquire a majority shareholding (more than 50pc) while at the same time leaving the Government's shareholding intact.

This would give IAG a majority shareholding and a high level of operational control. Ryanair previously made an offer on this basis, so there is a precedent for this.

The Aer Lingus share price is currently trading well below the IAG offer price of €2.55. This suggests the market is skeptical as to its likely success.

The decision of the government over the coming weeks will determine if the Aer Lingus share price is in for a smooth take off or a bumpy ride.

Mainstream looks forward to big African adventure

The renewable energy business Mainstream, founded by Eddie O'Connor has launched a Pan African renewable platform called Lekela Power.

The other shareholder in this platform is Actis, an emerging market focused private equity firm. Actis has committed $220 m for a 60pc equity stake. The remaining 40pc is owned by Mainstream.

The new venture has also secured further debt financing from a syndicate of international and African financial institutions, which will allow it to invest $1.9bn in new renewable energy projects across the African Continent. These projects will consist of solar and wind power stations.

The African continent has significantly lagged behind the rest of the world in relation to investment in energy infrastructure. This has lead to widespread disruption of energy supply. Routine blackouts cost the continent as much as 4pc of GDP according to the African Development Bank.

Eddie O'Connor has already been at the helm of a successful exit when Airticity was sold to SSE and E.ON for at a combined value of €2.2bn.

The scale of Mainstream's current investments means that a successful execution of the current project pipeline could lead to another very successful outing.

Strategic Bank's new initiative looks to SMEs

The Strategic Bank Corporation of Ireland (SBCI) has launched a new initiative this week, which intends to allocate debt funding to the SME sector in Ireland.

The total fund size will be €800m. The initial funding of €400 m will be allocated equally between Bank of Ireland and Allied Irish Bank.

The SBCI also intends to fund non-bank institutions in the future with specific lending strategies such as leasing. Funding will be provided at a lower cost than that generally available.

This will attract new players into the market, creating greater choice for Irish businesses. This is obviously a very positive development. The timing of this initiative is also very opportune in the context of the Irish economy beginning to demonstrate a sustainable recovery.

The National Pension reserve fund has seeded funding initiatives in the past that have successfully targeted larger Irish companies.

These investments have been made through private equity and debt funds such as Cardinal Carlyle and BlueBay. The average funding size of this new initiative will now allow funding to target areas it is most needed - towards the smaller Irish businesses that are the backbone of our domestic economy.

Dan Ennis is a Partner at Kish Capital a private equity firm based in Dublin.

Sunday Indo Business

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