As Michael O’Leary kept an eye on course conditions this week at Aintree – where Delta Work offers the tightest odds among four geldings he has lined up to run in Saturday’s Grand National – he must also have cast a sporadic glance at the going on the stock market.
With good reason. For Ryanair’s shares peeped above €21 for the first time three weeks ago – something that would unlock a €100 million bonus in stock options for the airline’s long-time boss if held for 28 days in a row.
So far, however, it’s only been able to string together two full sessions above that level, with that being broken on Thursday as sector investors baulked at a fresh rally in oil prices amid heightened tensions in the Middle East.
The incentive plan – which could also be triggered by Ryanair hitting a €2.2 billion annual profit – was originally due to run until this year, but was extended until 2028 in late 2022, when the shares were below €13.
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Were O’Leary’s bonus tied, however, to Ryanair’s US American depositary receipts (ADRs) – US trading certificates in foreign companies – he would have long been home and hosed.
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The ADRs of European companies typically trade at a premium to their underlying shares. But few more so than Ryanair, where the ability of non-European investors to play the arbitrage game is severely limited.
EU airlines are not allowed to have more than 49.9 per cent of their shares in the hands of investors outside of the union. In an effort to protect its European licences in the wake of Brexit, Ryanair moved in 2021 to extend a long-standing ban on non-EU investors purchasing ordinary shares to those in the UK. Ryanair ADRs – where each unit equates to five ordinary shares in Dublin – are the only option available to these.
However, Ryanair has not allowed the US bank behind its ADR programme – Bank of New York Mellon – to convert ordinary shares into new ADRs for the past 23 years, in order to avoid the risk of the foreign ownership rule being breached. (It also dropped its London listing in 2021 and took away voting rights of non-EU shareholders.)
As of last June, the equivalent of 43 per cent of its shares were held by way of ADRs by 54 holders.
The current $143.63 price of Ryanair’s ADRs – which would be the equivalent of €27.39 per ordinary share – put a market capitalisation of $33.2 billion (€31.1 billion) on the carrier, making it the highest-valued airline in the world, eclipsing Delta Air Lines’s $30.6 billion.
The ADR-based valuation is more than 30 per cent higher than the €23.7 billion one arrived at by the ordinary shares in Dublin. The premium has never been greater than now, according to Bloomberg data.
[ Ryanair chief Michael O’Leary on track for €100m bonusOpens in new window ]
“The ADR premium reflects growing demand among North American investors for exposure to the Ryanair equity story,” according to Joe Gill, director of origination and corporate broking at Goodbody Stockbrokers. “That exposure is limited due to ownership rules.”
But part of the growing premium is down to a widening divergence between Wall Street investors and their peers in Europe when it comes to environmental, social and governance (ESG) investing, according to other observers.
Ryanair lays claim to being a European leader in the climate change agenda for aviation, with a growing fleet of more fuel-efficient planes, a goal to have 12.5 per cent of flights with sustainable aviation fuel by the end of the decade, and investment in carbon-offsetting arrangements.
Still, it emitted 14.3 million metric tonnes of CO2 equivalent through jet fuel consumption in the year to March 2023 as it carried almost 182 million passengers, according to its latest sustainability report. (It flew 183.7 million passengers in its financial year that came to an end two weeks ago.)
European investors have seven times as much money in sustainable fund assets than US investors, following five consecutive quarters of US outflows, according to data from Morningstar, the US financial services group.
US outflows from sustainable investment funds in the fourth quarter of last year reached $5.1 billion versus $3.3 billion of inflows in Europe.
Almost three-quarters of European pension schemes said climate change was an investment priority in 2023, compared with a little over half of US schemes, a London Stock Exchange Group survey carried out last year found.
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It’s not just Wall Street. In Washington, the ESG agenda has become a political flashpoint in the last few years, with conservatives leading a cultural war on so-called woke capital and a watering down of regulations that promote disclosures.
Politicians in some states would go even further, with Republican legislators in New Hampshire proposing laws earlier this year that would make it a crime, punishable by up to 20 years in prison, to consider ESG criteria when investing state funds. The Bill was shot down in a state house vote in February.
The ESG backlash has largely been avoided, for now, by Europe, where the green agenda continues to enjoy broad consumer and political support. Will that see the valuation gap between Ryanair’s ordinary stock and ADRs continue to expand?
For O’Leary’s incentive plan, the focus remains on the ordinary shares. The next catalyst to drive the stock, which remained below €21 on Friday but still up 40 per cent over 12 months, may be the unveiling of its latest annual results on May 20th.
Bank of America analyst Muneeba Kayani said in a report this week she’d be looking for comments on summer bookings and fares, the effects of Boeing delivery delays, and the potential for the company to announce a fresh share buyback plan.
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“The airline continues to show best-in-class operational performance and is a cost leader [in Europe], allowing profitable growth from share gains, along with a strong balance sheet,” she said.
O’Leary, meanwhile, had a L’Oreal moment last month when asked about the bonus scheme in an Wall Street Journal interview.
“The obvious question is, well, is anybody worth €100 million over five years?” he said. “If premiership footballers are earning f***ing €20 million a year and [French soccer star Kylian] Mbappé is being paid €130 million to go play football for f***ing Real Madrid, then I think my contract is very good value for Ryanair shareholders.”
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