A flotation of Aer Lingus would be the most feasible way for the airline to raise badly needed capital, a Government commissioned report from Goldman Sachs has stated. However, if this happens it recommends that the State retains a substantial minority stake of at least 20 per cent.
The 50-page report, to be circulated to other departments by the Department of Transport, avoids making a definitive recommendation on the airline's future. However, it points strongly to the need for additional capital to meet the airline's objectives and provides arguments for an IPO over other options such as a trade sale or private placement.
The report acknowledges that the airline needs large scale funding to renew its long haul fleet and open new routes, reliable sources have told The Irish Times. The management goal of developing a low cost carrier requires fresh equity, it says, as such airlines need low debt. The Government is unlikely to provide the funding.
While it can do so on a commercial basis under EU rules, Goldman Sachs points out that it does not appear to be willing to do so and also could not step in to rescue the airline if a crisis developed in the notoriously volatile industry.
The report says raising this funding by offering stakes to institutions in a private placement might not be the most effective route. Financial institutions in Britain, the US and in Ireland took a cautious view of participating in such a placement.
The report says a major discount on the airline's value might be necessary in any private placement.
It is also believed to take an unfavourable view of the options of selling a stake to other corporate investors or to a strategic partner such as another airline. The report acknowledges that some type of discount on the full value of the airline would come into play in a flotation - possibly around 10 per cent - but argues that it would be significantly less than under other options.
Flotation would also be a completely transparent process.
The report says that as part of any IPO, the Government should retain a 20 to 25 per cent stake. This would allow the Government to retain an influence on key strategic issues, such as the future of its Heathrow landing slots. Under stock exchange rules, a stake over 20 per cent would also allow the State to block any other investor from a complete takeover.
The report says a flotation could be structured both to raise money for the airline and to get a strong return to the State from the sale of its shares. Typically in such flotations, the first primary stage would see a stake in the airline sold by the Government, with the proceeds going to the Exchequer. In the second phase new shares in the airline would be issued to investors, diluting the Government's remaining stake. The proceeds in this case would pass to the airline.
A special Cabinet sub-committee will meet quickly to discuss the document, although this may not happen until after the Taoiseach returns next Friday from the Far East. The sub-committee includes Mr Ahern, the Tánaiste, Ms Harney, the Minister for Transport, Mr Cullen, the Minister for Finance, Mr Cowen and the Minister for Arts, Sport and Tourism, Mr O'Donoghue. The ministers' difficulties have been eased by the decision of Aer Lingus's chief executive, Mr Willie Walsh, to withdraw the management buy-out plan.
The involvement of executives in participating in an investment plan, while they were also running the company, was deemed by ministers to be politically unacceptable. Facing questions in the Dáil on Wednesday from Socialist Party TD Mr Joe Higgins, the Taoiseach, Mr Ahern, said an MBO would "not be appropriate". So far it is not clear if he was then aware that Mr Walsh had told the Department of Transport Secretary General, Ms Julie O'Neill, two days before of the withdrawal.
