Monday, 21 May 2018

Ryanair: ownership and control

Ryanair's latest results are out today. Aside from the update on negotiations on unions, which I won't comment on..., the bit that caught my eye is the commentary on Brexit and the potential knock-on impact on Ryanair's shareholders:
We remain concerned at the likely impact of a hard Brexit. While there is a general belief that an 18 month transition agreement from March 2019 to December 2020 will be implemented and further extended, it is in the best interest of our shareholders that we continue to plan for a hard Brexit in March 2019. In these circumstances, it is likely that our UK shareholders will be treated as non-EU and this could potentially affect Ryanair's licencing and flight rights. Accordingly, in line with our Articles, we intend to restrict the voting rights of all non-EU shareholders in the event of a hard Brexit, so that we can ensure that Ryanair is majority owned and controlled by EU shareholders at all times to comply with our licences. This would result in non-EU shareholders not being able to vote on shareholder resolutions. In the meantime, we have applied for a UK AOC which we hope to receive before the end of 2018.
Just as a remainder, Ryanair has to be majority EU-owned and controlled to qualify as a European carrier. Currently something like 45% of its shares are accounted for by ADRs held by primarily US investors, so it is close to the limit. The problem is that once the UK leaves the EU whatever shares are held by UK investors will likely count against it. The rough estimate is that UK investors account for about 20% of shares held, so you see the problem.

Ryanair's route to get around this is quite interesting for a number of reasons. First up, what is proposed here - taking away voting rights - is a new twist. Ryanair had previously talked about forced sales of shares, or the creation of new European vehicles to hold shares for UK investors. Now they are talking about taking away voting rights from shareholders. [As an aside I note that the language talks about not voting on 'shareholder resolutions'. Surely this must apply to management-proposed resolutions as well or not much changes!]

The company states that it already has the power to do this in its articles, and I dimly remember some commentary related to the ability to disenfranchise shareholders when it was introduced years back. I'll have to go back and read to see how it works. Notably Ryanair would rather have non-voting shareholders than leaving voting rights alone and enforcing share sales. In a Bloomberg interview, O'Leary said that he felt that different shareholders would have different views on this, but if they didn't like it they could sell.

I assume that Ryanair will only do this in the event of a hard Brexit, but I'm not clear if it needs to do anything to put this into action (i.e. seek approval), so that deserves a look too.

It's also worth considering who would get hit. If we take the statement at face value it is ALL non-EU shareholders, and in the Bloomberg interview O'Leary talks about both the UK and US (and the language was the same on the earnings call). So that suggests that shareholders representing, say, 65% of Ryanair's shares lose their votes.

And which investors specifically would lose out? I reckon most of the big ones (data from Capital IQ): -

Here's my rough take on the largest holders: Capital's holdings are through ADRs, FMR is a mixture of US and UK, HSBC, Baillie Gifford and Jupiter are UK, Janus Henderson is a mixture of ADRs and UK.

If that group of investors loses its votes, then the largest voting shareholder would be Michael O'Leary, in a voting float of say 35% (though of course this might change in practice as some UK and US investors decide they don't want non-voting shares). That's interesting for Ryanair's corporate governance, especially given that its board is not overburdened with independent representation.

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