How Do You Price London's Biggest Share Sale? Very Carefully

(Bloomberg) -- As Irish Finance Minister Michael Noonan prepares to sell off Allied Irish Banks Plc in London's biggest share sale this year, he faces a dilemma.

Should the outgoing minister, in his last big decision, set the value too low next week, he risks annoying the taxpayers who had to bail out the lender. Set the price too high, and he may choke demand from investors still nursing losses from the last time Ireland sold a bank stake. Ideally, the shares would rise about 5 percent on the first day of trading, according to a person familiar with the government's deliberations.

For Noonan, there are two contrasting salutary tales to consider. On one hand, the 30 percent plunge in the value of Permanent TSB Group Holdings Plc after the government sold a stake in 2015. On the other hand, the U.K.'s 2013 sale of Royal Mail Plc, which drew political criticism after its shares almost doubled in the months afterward.

“Pricing the IPO is a delicate balance between avoiding the fallout after Permanent TSB's listing and harnessing the market's enthusiasm for banks currently,” said Jonathan Tyce, an analyst with Bloomberg Intelligence in London.

The government is due to set a price range for the sale of 25 percent of AIB's shares around June 14. In February, the state valued AIB at 11.3 billion euros ($12.7 billion). Government officials now expect it to be worth more, with a valuation at 12 billion euros suggesting a price of about 4.50 euros per share.

Advisers Goldman Sachs Group Inc. put AIB's “credible valuation range” at between 11 billion euros and 14.5 billion euros, while Investec Plc said the lender could be valued at much as 14 billion euros. That may be a touch too high, according to a government official, who asked not to be identified because deliberations are ongoing.

State Pressure

Two years ago, the government sold shares in state-owned Permanent TSB at 4.50 euros each, at the top of a range which began at 3.90 euros. Within days, the government began pressing lenders to cut mortgage rates, helping push down the value of the bank. The shares closed at 2.88 euros in Dublin on Thursday.

Given the government will still have 75 percent more of AIB to offload in coming years, it may not want to risk scaring off future potential buyers with a similar decline.

“For the government it's a case of striking the right balance,” Daragh Quinn, an analyst at Keefe, Bruyette & Woods, Inc. in London, said. “This is the first of what will be a number of share sales so you don't want to shoot yourself in the foot by making it too expensive.”

Royal Mail

By contrast, in 2013, Royal Mail soared 38 percent higher on its trading debut, prompting criticism of the Conservative-led U.K. government, which was accused of failing to get full value for the taxpayer in the nation's biggest state asset sale since British Rail was broken up in the 1990s. The shares still traded 20 percent above the offer price a year later.

Already, the AIB sale is generating political controversy, with Ireland's parliament calling on Noonan to delay the process. To protect against further criticism should the bank's value surge, the government has the right to buy as much as 9.99 percent of AIB's ordinary share capital at twice the IPO price.

While Noonan will set the price range, he is due to step down when lawmakers elect a new prime minister next week. Noonan's replacement - tipped to be current Public Expenditure and Reform Minister Paschal Donohoe - will decide the final price. A finance ministry spokesman declined to comment.

“Mid-range, with investor demand the acid test, seems a sensible route,” Tyce said.

To contact the reporter on this story: Peter Flanagan in Dublin at pflanagan23@bloomberg.net.

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Dara Doyle, Keith Campbell