Ireland Hedges Risk of AIB Surge as Lender's IPO Approaches

  • State can buy 9.99% of shares at twice IPO price for decade
  • U.K. privatization of Royal Mail in 2013 drew criticism

Ireland’s government will be able to buy back into Allied Irish Banks Plc after it floats part of the lender, allowing it to avoid political flak should the shares surge in the decade after the share sale.

The Irish finance minister will have the right to buy as much as 9.99 percent of AIB’s ordinary capital at twice the IPO price, the bank said on Thursday in Dublin. The warrants enabling such a move can be triggered for 10 years.

“It’s a high-quality problem we’ll be dealing with if we end up with a doubling of the market capitalization of the bank over that time period,” AIB Chief Executive Officer Bernard Byrne said in Dublin. “It’s a good mechanism for the state to prove that it has kept some upside sharing mechanism in the event that things completely outperform.”

The measure could insulate Finance Minister Michael Noonan from accusations of selling AIB too cheaply, as the U.K. government faced after the 2013 privatization of Royal Mail Plc. The postal service’s shares surged, almost doubling in months and prompting a review by lawmakers that called for more flexibility in IPOs of state assets that would allow the government to raise more money.

Noonan has yet to push the button on the AIB IPO, which is set to be one of the biggest share sales in London this year. The bank said on Thursday that profitability “is strong,” with bad loans continuing to drop.

The window for the disposal of 25 percent of the bank stretches into mid-July, Noonan said this week. The government may hold off on the sale until after the U.K. election in June, according to a person familiar with the matter.

The creation of the warrants isn’t “a surprise,” Investec Plc, one of the co-lead managers on the sale, said in a note.

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