Government changes tactics for Aer Lingus

Lessons learned by the Government from the Eircom flotation were applied in the selection of advisers for the Aer Lingus initial public offering scheduled for later this year.

Following the Eircom offering, a document was drawn up for the Departments of Finance and Public Enterprise by their legal adviser, Skadden Arps Slate Meagher & Flom. Entitled Proposed Rules of Engagement, it has now been released.

It sets guidelines to "pre-negotiate many of the more difficult issues which must get sorted between Government and underwriters". Department of Public Enterprises sources said last night that it was intended to prevent errors made during the Eircom offering.

A number of serious disagreements arose between the Government and its advisers in the final stages of the Eircom flotation. The most significant disagreement was over a commitment to consider a clawback of the advisers' fees.

The advice from Skadden Arps was that in all future cases these types of issues should be resolved "during the `beauty contest' phase of selection so that these issues are agreed when there is substantial competitive tension amongst banks".

It is understood that the guidelines were followed in the selection of advisers for the Aer Lingus IPO. AIB Capital Markets succeeded in winning the job of Irish advisers, while Salamon Smith Barney was appointed global advisers.

Morgan Stanley Dean Witter, another US investment bank pulled out of the competition at almost the last minute. It was reported that they withdrew because of differences over conditions surrounding the fees for the £600 million (€762 million) stock market offering.

Skadden Arps also recommended that advisers' fees should be capped, which was not done in the case of the Eircom sale.

The document also suggests that the advisers should be made to submit budgets for their expenses and the extent of the Government contribution to out of pocket expenses should be capped. AIB and Merrill Lynch received £1 million towards out of pocket expenses.

One of the most controversial aspects of the Eircom flotation was the large difference in the valuation put on the company by the Governments advisers. Merrill Lynch valued the company at €4.46 per share, while AIB suggested €3.73 per share.

In future the advising banks should "agree to submit a written valuation report which will include inter alia details of the valuation methodologies used," Skadden Arps said.