Privatisations: To buy or not to buy?
31st July 2013 00:00
Call it a response to the hole in the public sector finances, a tribute to the legacy of Margaret Thatcher or simply a return to Conservative values, but David Cameron's government has rediscovered privatisation.
There have already been several small deals but in 2014, exactly 30 years after Thatcher first popularised the concept with the sale of , there could be as many as three large privatisations.
One definite sell-off has already been announced: the privatisation of Royal Mail (it could even be done before the end of the year). Another has more or less seen the firing gun started, with George Osborne, the Chancellor, announcing in June that he is now investigating how to return the 39% of that is owned by the state to the private sector. The third possible deal for next year is , where the government is also keen to offload its 81% stake as soon as possible.
Meanwhile, the sell-offs of several state-owned organisations that aren't exactly household names are also continuing.
There's Urenco, for example, the nuclear processor that the government put up for sale in April. There's Plasma Resources, the agency that supplies the NHS with blood products, and which was sold to private equity firm Bain Capital in July. Similarly, the search and rescue bases operated by the RAF and Royal Navy have been sold as a going concern to the US firm . One part of the Student Loan Company has been sold and others are likely to follow.
Firing the gun on another round of privatisations
Sold in spring or summer of 2013
Plasma Resources UK
Search and Rescue
Sale due for second half of 2013
Urenco
On the block during 2014
Royal Mail, Lloyds Banking Group, Royal Bank of Scotland, Student Loans Company (tranches of loans).
Sales possible for the future
Companies House, Land Registry, Met Office, Ordnance Survey, Eurostar, NATS, Royal Mint.
There may yet be other deals to be done. The government owns sizeable stakes in around 20 commercial organisations, including those listed above. Several, including the Land Registry, the Meteorological Office, Channel Four and Eurostar (where the state stake is 40%) look saleable to a greater or lesser extent.
So are we about to see an opportunity for a second generation of "Sids" to cash in a series of privatisations generously priced to catch the eye? Between 1980 and 1990, the number of private shareholders in Britain rose from three million to 10 million, with advertising campaigns such as the "Tell Sid" British Gas promotion persuading first-time investors to risk their cash on the stockmarket - and the handsome gains enjoyed by those who took part in the early privatisations encouraging many more to join the party.
However, there are several reasons to think a repeat of the 1980s is not on the cards. With the benefit of hindsight, the long-term legacy of the original privatisation phenomenon now looks far from universally positive (best not to ask Railtrack investors what they think) and this time around there are many doubts to be resolved.
Certainly, some of the major privatisations of the 1980s turned out to be fabulous investments - both in the short term, with issue prices heavily discounted in order to encourage the public to get involved, and for those who held on to their shares.
A £135 investment in British Gas in 1986 (the minimum allowed in the privatisation) would today be worth around £1,700, a twelvefold return, even before dividend payments. By contrast, the FTSE 100 index (UKX) is up only three times over the same period. BAA, and Powergen are other examples of where investors' long-term returns have been impressive.
However, not all sell-offs have produced such sustained performance gains. While the price of BT doubled in the months following its 1984 privatisation, providing quick wins for "stags", who bought in order to sell at a profit almost immediately, the stock is up only threefold today, compared to a four-fold increase from the FTSE 100. Figures from stockbroker Brewin Dolphin suggest that as many as a third of the 80s privatisations, including , BT and British Airways (now under the umbrella), have since underperformed the Footsie.
Moreover, there is no guarantee investors will be able to cash in, even assuming these privatisations are a success. In many cases, they may simply be excluded from the privatisation process - deals for Plasma Resources and the search and rescue teams were simply done as trade sales and Urenco looks likely to follow suit. Royal Mail's sale will include a public offer, but we don't yet know how the banks will be sold.
In any case, there's a reason why it has taken so long to flog these last few pieces of family silver - in each case, there are difficult issues to overcome.
Often, these issues are potential brakes on the performance of the company, which reduces their attractiveness to investors - Channel Four's public sector broadcasting responsibilities, for example. Sometimes they may derail the sale process completely, as happened when the government tried to privatise NATS, the organisation that runs the UK's air traffic control network.
That may mean, of course, that the government feels obliged to price public offers as keenly as possible, good news for would-be stags. However, ministers need every penny they can get from these sales and are acutely sensitive to accusations that they are selling off state assets for political and economic expediency. These pressures will mitigate against bargain-basement deals.
That, however, is not to suggest there will not be opportunities for investors from the forthcoming privatisations. And the government certainly understands the need for a strong start to the process - a few successful deals to begin with will ease the way for further privatisations in the years to come, raising much-needed cash with which to plug the deficit.
Either way, investors are about to be offered an opportunity that many will have never seen before. Consider these deals on a case-by-case basis, but don't ignore them altogether.
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