Be patient and you'll save money.
A flotation price is usually, though not exclusively, an opportunity for the smart private equity money men to exit. In so doing they often make millions selling an overpriced business to private investors like you and I.
Think I'm being a bit harsh? Well, okay a few flotations do make private investors money as the share price continues to thrive. However, a sizable number declined appreciably after floating.
The recent flotation of Gartmore Group (LSE: GRT) is a case in point. Its float price was 220p, yet on the very first day of trading its share fell 3p to 217p and are now approximately 215p.
A week prior to trading, they were marked down from an initial range of 250p to 330p, due to lack of demand by City institutions. It is reported that they believed the offer price was far too expensive.
In the past five years around 300 companies have floated on the London Stock Exchange. I don't have the data to hand to know what percentage of these is above their float price, but I'd hazard a guess that it is a minority.
Names that stick out as having been overpriced are the following:
- Jessops (LSE: JSP). Floated in November 2004 for 155p, now worth 0.9p after restructuring in September 2009.
- Hill Station. Floated in October 2004 for 8p and went into administration in October 2008.
- Premier Foods (LSE: PFD). Floated in July 2004 for 215p and is now worth 35p.
Of course, some floats are worth buying into. For example, car insurer Admiral Group (LSE: ADM) floated in September 2004 at 275p and its shares are now worth 1,134p.
Hindsight is a wonderful thing; the real issue is how do we spot whether the price is realistic at the time of floating?
It's certainly worth doing as much research as possible before buying into any new float. Here are ten questions for starters:
- What was its previous trading history?
- Has private equity had to pay down lots of debt in order to keep the company going prior to attempting to bring it to market?
- What is its present debt situation?
- How keen are institutional investors on buying it?
- What price do spread betting firms think it will trade at (known as the 'grey market')?
- What does the company plan to do with the money raised?
- What is the company's market-share in relation to its competitors?
- What are its growth prospects?
- What experience does the management have, both in the industry it operates in and in other public companies?
- How much of the company is owned by the management?
Even then, you probably can't be sure if the price is right. Personally, I know my limitations and can't pretend to be smart enough to know when a float is overpriced.
Therefore I give myself a margin of safety and typically wait until after a company has been on the market for at least a year before buying in. By that time, you have some more hard evidence to go on, rather than a sales brochure in the form of a prospectus.
Next year's crop
It is worth giving this issue some thought as, now that the worst of the recession appears to be over, 2010 could be a bumper year for flotations. According to Standard & Poors there are at least 18 possible listings that could take place next year. These include:
- New Look Group -- the budget fashion chain
- Saga -- financial services and leisure group that caters to the over-50s
- Jupiter Investment Management -- fund manager
- Merlin Entertainments Group -- runs Legoland, The London Eye and Madame Tussauds
- Tommy Hilfiger -- the fashion brand
- Alliance Boots -- the high street chemists
Some of these are new to the market while others, such as Boots and New Look, have been quoted before.
Choose carefully and do your homework and hopefully you'll avoid paying out for overpriced flotations.
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