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Sale of Market Stabilisation Shares by the Government
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18 October 2006

To ask the Minister for Transport the advice received on the sale of 7% shareholding in Aer Lingus that had been retained to stabilise the market; the person who made the decision to sell; if the shareholding was sold in a single block; if they were sold on the open market or by an individual deal; and if he will make a statement on the matter.

Richard Bruton.

For WRITTEN answer on Wednesday, 18th October, 2006.

Ref No:   33483/06

Answered by Minister for Transport

(Martin Cullen)


In order to set the context to respond to the questions raised by the Deputy, I propose to set out below a description of over-allotment arrangements and how they were applied in the Aer Lingus Initial Public Offer (IPO).

  • An over-allotment option (often referred to as a greenshoe option) is a price stabilisation mechanism that is a common feature of IPOs.
  • It is common practice in IPOs for the stabilising manager (which will usually be the lead underwriter) to over‑allocate shares in order to put itself in a position to stabilise the share price for a short period of time following the IPO ‑ this over‑allocation is usually of a number of shares equal to 15% of the number of shares in the initial offer.  Such an over‑allocation leaves the stabilising manager with insufficient shares to satisfy its contractual obligations as it has sold more shares than are available in the initial offer. 
  • Depending on the share price performance in the immediate aftermath of an IPO, shares required to satisfy the over-allocation are either bought by the stabilising manager on behalf of the other underwriters in the market in stabilising transactions or are settled through the exercise of the greenshoe option.  The exercise of the greenshoe option entails the issue of additional shares by the company to the stabilising manager and/or the purchase of additional shares by the stabilising manager from the existing shareholder(s).
  • In the Aer Lingus IPO the greenshoe option was granted to the stabilising manager for a 30-day period starting on the day that the IPO offer price was announced. Over-allotment options equivalent to 15% of the total number of shares offered in the IPO were granted to the stabilising manager on behalf of the underwriters, on the advice of the underwriters. The options were given by the Minister for Finance (10%) and Aer Lingus (5%).
  • The Aer Lingus IPO was structured on the basis that the objectives for the States retained shareholding and the raising of new equity for the Company would only be fully realised if the greenshoe options were exercised in full.
  • If the share price had fallen below the IPO offer price immediately following the IPO, the stabilising manager could have bought shares amounting to up to 15% of the total offer in the market in order to satisfy over-allocations.  In a scenario, where the full 15% of the offer was bought in this way, the greenshoe options would not have been exercised at all and the State would have retained a shareholding of almost 35%, while Aer Lingus would have issued 5% fewer new shares. (The States share of the greenshoe 10% of the offer equated to 6.5% of the shares in the company). In this scenario, the proceeds of the IPO for the State and the Company would have been reduced by €64.4 million and €32.2 million respectively.
  • As the share price rose following the offer it was not necessary, in the case of the Aer Lingus IPO, for the stabilising manager to make market purchases in order to stabilise the share price. Consequently, the stabilising manager was unable to use shares bought in the market in stabilising transactions to satisfy the over-allocation and, as a result, was obliged to exercise the greenshoe options described above. The Minister and Aer Lingus were obliged to sell the greenshoe shares to them on the agreed terms. This resulted in the States shareholding being reduced to 28.3%, which is in line with the Governments intention of maintaining a significant minority shareholding.
  • Once the greenshoe option had been granted there was no discretionary element on the part of the State in the exercise of the greenshoe after the IPO. The underwriters had contracted to sell shares in the IPO process, which they could not obtain in the market because the price had risen (as frequently occurs after an IPO). To meet their commitments, they had to exercise their options (granted pre-IPO for that purpose and in anticipation of a price increase post-IPO) and the Minister and Aer Lingus had to make the shares available to them. All of this is quite normal and in accordance with established IPO procedures.
  •   Legally, stabilisation cannot be carried out for greater than 30 days after the announcement of the IPO offer price.  In a situation where the share price is significantly above the issue price and trading well, it is open to the stabilising manager to call on the over allotment option at any time before the end of the 30 day period and end stabilisation.   Exercising the option shortly after the flotation sends a strong signal to the market that the stock is performing well and there is no requirement for the stock to be stabilised by the stabilising manager.

In the light of the explanation set out above the answer to the points raised by the Deputy are as follows:

On the day that the greenshoe options were exercised (i.e. 3rd October 2006), no additional shares belonging to the State (or newly issued shares by Aer Lingus) were allocated to investors. All allocations to investors had already taken place at the time of the IPO, and the greenshoe option exercise was merely used to satisfy the short position created by these over-allocations.  Any assumption therefore that the reduction in the States shareholding from 34.8% to 28.3% that took effect on the exercise of the greenshoe was as a result of additional shares being released to the market is therefore incorrect.

The decision to exercise the greenshoe options was taken by the stabilising manager on behalf of the underwriters once it was clear that the shares were trading consistently above the offer price. My Department was informed of the decision to exercise the greenshoe in advance.