How do I deal with looming IAG offer for my Aer Lingus shares?

Q&A: Dominic Coyle

IAG has made a €2.50 per share offer (along with a five cent dividend) for Aer Lingus. Photograph: REUTERS/Cathal McNaughton

IAG has made a €2.50 per share offer (along with a five cent dividend) for Aer Lingus. Photograph: REUTERS/Cathal McNaughton

 

I have 400 Aer Lingus shares and I received a letter recently from Davy offering me two options:

1. Don’t do anything

2. Accept the €2.50 cash offer.

When I rang Davy and asked them what would happen to my shares if I decided to go for option one they said they didn’t know.

I tried to explain to the Davy person that this, therefore, was not really an option but I don’t think she understood the point I was making.

Do you know what will happen to the shares under option one? I would be very grateful if you could help as Davy have given me a deadline of July 9th to decide.

Is there a likelihood that unsold Aer Lingus shares could be converted to IAG shares?

I’m thinking of the infamous Eircom share deal a few years ago when, as a result of a buyout, shares were converted to Vodafone shares.

Mr V O’H, email

Well, that’s not very helpful of them, is it, especially as Davy must know exactly the implication of each choice. If not, they should not be allowed take calls such as yours.

Essentially, IAG has made a €2.50 per share offer (along with a five cent dividend). You can accept this price if you choose to, or ignore it.

Your accepting it obviously is useful for IAG as it gives them a clearer idea of how much support their offer has early in the process and brings them closer to the “unconditional” acceptances level.

It’s far less important for you and can, in fact, limit your room for manoeuvre.

However, even if you accept, you can then change your mind and withdraw your acceptance at any time up to 42 days after the formal posting of the offer by IAG – June 19th – unless they have gone “unconditional” before then.

So what is the July 9th deadline that Davy has given you? That is the day before the “first closing date” for the IAG offer under the takeover panel rules.

As I said above, while clearly it would suit IAG to have the whole thing wrapped up by then, there is no great pressure either on it or on you in relation to that date. And regardless of the exhortations from your broker, there is nothing to stop you biding your time – at least up to day 42 of the offer process, which is July 31st.

But what about that reference to “going unconditional”?

Any offer of this sort generally has a series of conditions attached to it, which the acquiror wants to be fulfilled – such as a minimum level of acceptances from shareholders, or acceptance by certain key large shareholders. If those conditions are satisfied, the acquiring company can declare the offer unconditional.

In the case of Aer Lingus, going “unconditional” would entail IAG securing their target of not less than 50 per cent acceptances, including those of the Government and Ryanair, which would bring them above 50 per cent anyway.

It is also dependent, among other things, on the EU not instigating a protracted competition inquiry into the deal. In total, there are nine pages of conditions in the offer document, some of which are very technical.

IAG has given itself fairly wide options on what to do if the offer does not secure the acceptances it expects – or if it runs into trouble with EU competition authorities. Apart from those issues listed above, the airline group can “waive” any other conditions if it so chooses.

If they don’t secure enough shareholder support, there are a number of options open to IAG. The offer may lapse, they may upgrade the offer (to a higher sum that would apply to everyone, including those who previously accepted the lower offer, provided they do so by a certain date – day 46 in the offer timetable, August 4th) or, in certain circumstances, choose to allow that rump of “dissident” shareholders to remain shareholders.

This last is unlikely in this event, though not impossible. IAG has set a minimum acceptances level of 50 per cent, as stated above, but the same condition allows it to step away if it does not secure 90 per cent support.

Assuming the offer has been declared unconditional, shareholders who have accepted the offer are locked in: if you have accepted the offer and day 42 (July 31st) has passed, equally you cannot withdraw that acceptance until the whole scenario has played out.

However, even if the offer is declared unconditional, you will be able to indicate your acceptance thereafter.

But what if you continue to ignore it? If IAG secures the approval of people holding 90 per cent of the shares in Aer Lingus, it is entitled to acquire the shares of all other investors compulsorily at the offer price. If you wait to have your shares compulsorily acquired (if that’s what happens in the end), the only impact is that you will receive whatever the eventual takeout price per share is slightly later than those who opted earlier for the offer. It’s simply a matter of administration, nothing else.

So what happens if Aer Lingus decides to go unconditional but does not get to the 90 per cent level that would allow it to force you out?

It’s an unlikely scenario but if it gets acceptances from holders of 75 per cent of the stock, it has said in the offer document that it will move to delist the shares. Essentially, you will then hold shares in a private company, which could well be more difficult to trade and awkward to price.

It is worth addressing that Eircom/Vodafone analogy. This IAG offer for Aer Lingus is very different to the Eircom/Vodafone situation. On that occasion, Vodafone offered to buy the Eircom shares with its own shares instead of cash: in this case, IAG is making a cash offer, so it is not offering its own shares (whether you want them or not).

Without getting too clever about the thing, the fundamental decision for you is whether you think this is a good price or the best price likely to come on to the table for Aer Lingus. If you do, then you will probably accept the offer at some point but you do not necessarily have to be in a rush to do so. If you really want to hold on to your shares (which may not ultimately be possible), you can simply ignore all deadlines until forced to act, if at all.

But before you decide one way or the other, it would be worth your while working through the offer document. I know this is a 96-page legal document but, while there is certainly plenty of legalese in there, the basic parameters of the deal are fairly clearly laid out. If it helps, you can read the document online, which might help if you are looking for certain search terms. It can be found at http://iti.ms/1CgbFkp.

One date for your diary should be July 16th when an extraordinary general meeting of Aer Lingus shareholders will be held at the Crowne Plaza Hotel, in Santry, not far from Dublin Airport, at 10am.

Inheritance tax across borders I have three children so under current Irish inheritance rules, the threshold of €225,000 will apply to each child. However, one child lives permanently in the UK. Will that child be entitled to a UK inheritance tax threshold (which I believe is higher than the Irish threshold?) If affirmative, how does the tax system apply?

Mr T O’C, email

In Ireland, capital acquisitions tax (CAT) is an issue for the beneficiaries: in the UK, inheritance tax is levied on the estate (assuming it is above the necessary threshold). It is not necessarily the case that the threshold is high. While the UK threshold states that estates worth less than £325,000 (€457,000 roughly) pay no tax, your three children can inherit €675,000 between them without any liability to CAT.

In any case, there is a double taxation agreement in place to manage just such situations. It provides that where the deceased person is resident here (for tax purposes), the estate comes under the Irish rules. The fact that one child/ beneficiary is permanently resident in the UK is irrelevant. The Irish threshold will apply.

Send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara St, D2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.

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