As the airline's stock soars after Ryanair bid, Caroline Madden examines the options open to investors

Despite the Eircom fiasco, the notoriously volatile nature of the aviation industry and, in many cases, a lack of stock-picking experience, small Irish investors just couldn't resist taking a flutter on the flotation of the Republic's national airline.

For some individuals, the Aer Lingus flotation will have been their first time to tentatively dip their toes back into stock market waters since the Eircom washout at the turn of the century.

However, the Aer Lingus flotation was heralded with much less pomp and ceremony than in Eircom's case. And thanks to Ryanair's offer to buy the airline yesterday, it looks to be in little danger of following the same path.

"Eircom had already started to soften at this stage," one broker commented. "The [ Aer Lingus] share price has held up well in the trading period to date." At €2.20, the offer price was carefully gauged to ensure that the airline made it off the ground successfully, and the share price has been rapidly gaining altitude since.

Boosted by falling oil prices, it broke the €2.50 mark by the middle of this week, before jumping over €2.80 on the back of Ryanair's approach.

The €10,000 minimum investment threshold set for retail investors was designed to prevent small savers gambling everything on this flotation, but the basis of allocation of Aer Lingus shares was nonetheless skewed very much in favour of the smaller investor.

Individuals applying to invest less than €20,000 received a 100 per cent share allocation, whereas larger investors wishing to invest €250,000 or above received just 7 per cent of the share allocation applied for. One broker reported that the average investment by private clients was €19,000, and the average allocation was 8,600 shares.

So why prevent the very smallest investors from getting involved and then tilt the odds towards the lower end of the spectrum? According to one dealer, the logic behind this was to deter larger investors solely interested in making a quick profit. "The viewpoint was the small investor was likely to be a medium-term investor." However, many small investors have already jumped off the gravy train and pocketed a tidy profit, perhaps a little too soon given yesterday's move by Ryanair. "Probably 50 per cent of people who got stock through us have already departed," one trader observed. "A lot of people were in this issue to stag it, essentially."

What about private investors still on board the Aer Lingus juggernaut? Should they be planning their exit strategy, sitting tight, or increasing their holding at this point? The advice from Aer Lingus at the moment is to do nothing. In due course Aer Lingus shareholders will receive an offer document from Ryanair and the bid process will unfold.

Things can go several ways. Aer Lingus has rejected the offer and Ryanair may yet come back with a higher offer. Equally a third party - probably another airline - may decide to enter the fray. All of these outcomes may yet result in a higher price for the shares than the €2.80 being offered by Ryanair.

The fact that the shares are already trading at a premium to €2.80 indicates that some investors believe this will happen.

Any shareholder taking this view should hold on and watch developments. One quite real possibility is that Ryanair does not succeed in taking control of Aer Lingus but becomes a big shareholder along with the Government and the employees. Another possibility is the bid will not succeed and have to be withdrawn.

The main risk to the takeover is that it fails to win regulatory approval, either at home or at EU level. However, Ryanair is confident these obstacles can be overcome, despite the fact that the combined business would have a near monopoly on routes out of Ireland.

Should the deal come unstuck or not produce a clear outcome, Aer Lingus shares will fall back and any investor taking the view that the deal will not succeed may be well advised to sell into the market now, unless they really see the shares appreciating above €2.80 in the short term of their own volition.

Before the Ryanair bid materialised, the view was that this was unlikely. One trader commented earlier in the week: "At current valuation levels [ €2.50], it's probably still reasonable value. We would probably see it trading in a range of €2.30 to €2.70 in the short term. If I saw it getting up to €2.70, I'd probably be taking my profits."

Small shareholders planning to take their money and run may not be regular investors and so may not have considered the tax implications. Gains on the disposal of assets such as shares are liable to capital gains tax (CGT) at 20 per cent. However such gains are reduced by an annual allowance of €1,270.

Frank Green, tax partner at Mazars, says this allowance is not transferable between husband and wife, but spouses who applied jointly for Aer Lingus shares will be able to utilise both allowances fully if necessary.

Gains arising between October 1st and the end of 2006 will be due for payment on January 31st, 2007, and taxpayers must file a return by October 31st, 2007.

Shareholders making their first foray into the stock market since the Eircom debacle will be glad to hear that even that cloud may have a silver lining. Unused capital losses from share investments such as Eircom, may be offset against gains realised on the sale of Aer Lingus shares, thus reducing or possibly eliminating any captial gains tax (CGT) liability.

Aer Lingus investors who hold their nerve for another 12 months will be rewarded with bonus shares. Green says this bonus issue will not carry any tax consequences at that point. "In effect it's treated as a free share."

However, if shareholders sell off part of their shareholding in tranches after this point, the bonus issue will affect their CGT calculation.