Retail investors in AIB could see the value of their shares almost wiped out following plans announced on Tuesday that the government will press ahead with its long-awaited share consolidation. The move is part of a capital reorganisation aimed at enabling the government to sell down some of its 99.8 per cent stake in the bank sometime next year.

For example, investors who bought the share at 7 cent yesterday would stand to lose 75 per cent of the value in their shareholding, although such investors are likely to be few in number given warnings in recent years that investors should avoid the stock as it’s over-valued.

The anamoly

AIB's market capitalisation has long been an anamoly; it has some 523 billion shares in issue, a result of multiple bailouts since 2009, giving it a market capitalisation of € 36 billion as of this morning, based on a share price of 6.9 cent. To put this in comparison, Bank of Ireland has about 32 billion shares oustanding, while German giant Deutsche Bank for example, has a market capitalisation of €33.4 billion - less than AIB. The government owns 99.8 per cent of the bank, with just 0.2 per cent in free float. About 1 billion AIB shares (0.2% of total issuance) are understood to be in the hands of retail investors.

However the anomaly hasn't stopped retail investors opting to buy the shares, something which is evident by the movements in share price in recent years. This is despite warnings from Minister for Finance Michael Noonan to investors not to buy the stock as it's over-valued.

In addition, investors who held AIB shares pre-crash, have simply held onto their shares. If the bank’s recapitalisation had been constructed in a different way, shareholders would have been wiped out entirely at that point. However, the Government opted not to take a 100 per cent ownership of AIB, as doing so would have put the bank’s liabilities on the state’s balance sheet, which would have pushed Ireland’s outstanding debt up considerably.

The consolidation

Now, under the new plan, these investors stand to lose at least 75 per cent ( or as much as more than 90 per cent) of their investment, depending on when they bought into the stock, once the consolidation goes ahead. However one source has suggested, albeit viewing it as unlikely, that the Government could look to compensate investors who bought the stock in recent years in some way.

While the full details of the share consolidation have not yet been released, a number of steps will follow this morning’s announcement. Firstly, the government’s 2009 preference shares will be converted into ordinary shares at a potential conversion price of 1.7 cent a share. This would value AIB’s ordinary shares at €11.7 billion, and is expected to push the number of ordinary shares in issue up to 681 billion, further diluting shareholder’s stakes in the bank.

Subsequent to this, the conversion on a 1-for-250 basis will be completed, and it’s understood that retail investors will lose more than 75 per cent of the value of their shareholding, based on yesterday’s share price. The share consolidation will reduce the number of ordinary shares in issue post conversion to approximately 2.7 billion ordinary shares.

Hence, an investor with 1,000 AIB shares today, with a value of some €69, will hold four shares post conversion at a value of about €17.20 (based on a share price of about €4.30 each), a reduction in value of about 75 per cent.