AIB and Merrill Lynch took a cut of €3.4 million (£2.6 million) in fees after being accused by the Department of Public Enterprise of adopting a grossly misleading approach when negotiating their price for floating Telecom Eireann last year.
The banks were eventually paid €28.4 million each but only after a heated row with the Department just two months before the IPO last June. It followed an attempt by the Department to negotiate a fee clawback. Department officials maintained the banks had said they were willing to discuss such a clawback when they had agreed their fees in July 1998.
AIB and Merrill Lynch told the Department in May 1999 that they had only agreed to discuss a clawback in the event that the market rates for professional adviser's fees fell between the time the fee was agreed in July 1998 and the IPO a year later. In a letter dated May 12th, 1999 the head of AIB Capital Markets, Mr Colm Doherty and his Merril Lynch counterpart, Mr Russell Chambers, claimed that as fees had not fallen during this period, there was no basis for clawback negotiations.
The Department maintained that their understanding of the clawback agreement was that it was also to be discussed if the value of Telecom Eireann increased substantially ahead of the IPO. A memo prepared for Mr Brendan Tuohy, the assistant secretary at the Department of Public Enterprise that has been released under the Freedom of Information Act, strongly criticises the banks' stance.
"The JCGs (joint global co-ordinators) offered to have a meaningful discussion on clawback with us at the time of signing the letter of engagement. The terms of their letter of 12th May indicates that this was a grossly misleading approach. A more honest approach would have been to eliminate any reference to clawback,' wrote Mr Eamonn Molloy, a principal officer in the Department.
Mr Molloy went on to recommend that the Department should "go for it" on the clawback. He pointed out that it was documented in both the fee letter and the letter of engagement signed by the Department and the two banks.
He also pointed out that the value of Telecom Eireann had increased considerably since the advisers were hired and their fees, which were a percentage of the overall proceeds, would also increase.
The two banks eventually agreed to forgo an incentive fee of 0.25 per cent of the proceeds of the shares sold to institutional investors, but they did not concede any further ground on their fees for the sale of shares to private investors. The incentive fee would have been worth almost £3.4 million based on the flotation price of €3.90.
The Government and the banks agreed they were to receive 2 per cent of the proceeds of the institutional part of the offering. Their fee for the retail offering was linked to investor demand and was on a sliding scale from 1.4 per cent to 1.8 per cent of the proceeds. In the end they received 1.45 per cent.
The invoice submitted by the two banks shows that AIB and Merrill Lynch were paid €28.4 million (£22.4 million) each for their work on the issue. Both banks also received an additional $225,000 (€234,717) in respect of shares sold in the US. Another €3.3 million was paid to other banks involved in the international offering.
The advisers also received £1 million in out of pocket expenses but sources close to the two banks said yesterday that the bulk of this went to pay their legal advisers. McCann Fitzgerald, the Irish legal adviser, received in the region of £250,000, while Linklaters & Paines, the international legal counsel, was paid in the region of £750,000.
Irish International, the advertising group, was paid £3.2 million for its services, while Citigate Dewe Rogerson received £2.6 million for public relations and marketing advice.
