Eircom experience may limit Aer Lingus flotation

Floating Aer Lingus on the stock market might seem far simpler than the €8 billion (£6.3 million) flotation of Eircom earlier this year. However, analysts in Dublin concur that it may be difficult to generate public interest in the Aer Lingus initial public offering (IPO) while interest from institutional investors will hinge on how aggressively the Government sets the price.

The Minister for Public Enterprise, Ms O'Rourke, spoke positively last night about the likely public response to an Aer Lingus share offering. Analysts believe public interest may be tempered by the experience of the Eircom IPO, where more than 550,000 people bought shares only to see them perform poorly since the July flotation.

"A lot of people will probably be wary of buying into any State asset flotation after Eircom," said one analyst.

Dublin stock-broking firms were reluctant to comment on the prospects for the Aer Lingus IPO, mainly because their firms are likely to be pitching to advise the Government or the company. However, those analysts who spoke to The Irish Times said the Government must not repeat the mistake of Eircom, where it is now generally accepted that the shares were sold too high.

Analysts also said that pricing the Aer Lingus IPO is complicated by the fact that the company is likely to raise a substantial amount of money through new shares to fund its fleet replacement programme.

Aer Lingus has never indicated how much equity it would raise but it has indicated it will need to invest €500 million to €700 million over the next five years.

Much of that expenditure could be funded through borrowing, but analysts believe Aer Lingus will try to raise €150 million to €200 million in the IPO, apart altogether from the suggested £600 million (€760 million) that Government would hope to raise from the sale of its own shares.

"The more money Aer Lingus raises, the less the Government can expect to get," said an analyst. "Aer Lingus is only worth so much.

"Airlines aren't a particularly sexy sector right now and people thinking of investing in Aer Lingus will have to be aware that they're investing in a small company in a very cyclical industry. When times are good like they are now, they're very good, but when the industry turns down, things tend to get very bad. This isn't a stable industry," he added.

Other analysts think Aer Lingus has several factors going for it in the run-up to an IPO. "Being part of the Oneworld alliance is a major plus and should make it easier to market the shares to international investors, and being the flag carrier of a booming economy is another plus," said another analyst.

He added that after the financial restructuring and the cost-cutting in the Cahill plan, Aer Lingus was probably in better shape than many other European airlines.

One fund manager warned that with a market capitalisation of £600 million, Aer Lingus would be part of that mid-cap sector that Irish institutions had been selling as part of their post-euro asset re-allocation.

"At €760 million, Aer Lingus would barely make it into the Irish top 20 stocks," he said, adding that it would make up little more than 1 per cent of the market. "That's not the size that attracts investment money," he said.

The fund manager also said that much would depend on the size of the employee shareholding in Aer Lingus and on industrial relations in the airline in the run-up to the IPO.

"If the pilots do go on strike, then that would send a very bad signal to potential investors," he said, adding that investors would also be uncomfortable with the employee stake being anything bigger than the 14.9 per cent held by Eircom staff.

The overall reaction in the market yesterday was that the Government, Aer Lingus and their selected advisers will face a tough task in persuading both private and institutional investors that the airline is a worthwhile investment.