Aer Lingus given a wake-up call

Analysis: Ryanair's chief has upset plans for a smooth flotation of Aer Lingus, writes Arthur Beesley.

Aer Lingus chairman John Sharman was at home in London early on Thursday morning when a phone call came from the US. The Ryanair chairman David Bonderman was on the line with the most startling of messages: Ryanair was making an offer to buy out its arch-rival and it had already swept up 16 per cent of its shares

Ryanair's "project bargepole" was out in the open. Initiated in great secrecy while the Government made final preparations for the long-delayed privatisation of Aer Lingus, the proposed deal was the most audacious move yet by Michael O'Leary, Ryanair's bombastic chief executive.

Mr Sharman immediately set about phoning the directors of Aer Lingus and its chief executive Dermot Mannion, who had left for a cruise holiday in the US when the flotation went ahead days earlier. Some of those Sharman phoned are said to have been flabbergasted at the news.

At Jurys Hotel in Dublin, Mr O'Leary hit the phones too. He couldn't contact Bertie Ahern, but he spoke with the Taoiseach's special adviser, Gerry Hickey. At 8am, as Ryanair told the stock market of the development, Mr O'Leary also spoke with Government Ministers Brian Cowen, Michael McDowell, Martin Cullen and EU Commissioner Charlie McCreevy.

Even accounting for the turmoil in Government over the Taoiseach's personal finances, the news was stunning. Less than 10 days earlier, Mr Ahern and his colleagues had signed off on the Aer Lingus flotation at a price of €2.20 a share. This was at the bottom end of the €2.10-€2.70 range indicated in advance of the listing. Now Mr O'Leary was offering €2.80 a share to walk away with Aer Lingus.

After years of obfuscation over the ownership Aer Lingus, the formal listing of the airline on the Dublin and London stock markets last Monday had gone off without a hitch. Now, courtesy of Mr O'Leary, the deal had blown up in the Government's face.

With Ministers now open to the accusation that they had taken too low a price for the shares, questions were asked about the expensive professional advice they took before the initial public offering. At a cost of some €35 million, more than three dozen professional advisers had worked on the flotation for Aer Lingus and the Government.

Ryanair was ready to pounce once trading in Aer Lingus shares on a grey market started last Wednesday week. As the Aer Lingus advisers put the final parts of the flotation in place, Mr O'Leary and his team were elsewhere in Dublin plotting to unwind the transaction.

But should his move have been foreseen? Several sources close to the flotation said yesterday that a Ryanair bid scenario was considered by advisers to Aer Lingus and the Government but ruled out as implausible. "Just because it's happened doesn't mean it's not off the wall," said a source close to the Government.

And what of the flotation price? Informed sources said the €2.20 price was chosen because interest from the big institutional investors that the Government wanted to attract into the airline began to taper off at €2.25 and upwards. The argument goes that a listing priced at a higher rate would have left Aer Lingus with more hedge fund investors than institutional holders.

However, it must be remembered that the requirement under international rules for a majority of Irish investors in Aer Lingus increased the power of Irish institutions in talks on pricing.

The irony now is that Mr O'Leary is lining up to have the final say on the price of an airline whose very competence and business he ridiculed for years. The Government will have a tough time resisting this particular deal.