By Professor Richard Roberts of King's College London
The plan is to sell shares to individual investors at a 5% discount, with a bonus for holding them for more than a year. Massive advertising echoing the legendary “Tell Sid” campaign of 30 years ago, which so effectively marketed the British Gas sale, is promised.
Privatisation in Britain was invented well before that — in October 1953, 62 years ago this month — by a Conservative administration that sold Britain’s nationalised steel companies back to private investors. Steel was part of a host of major nationalisations by the post-war Labour administration, such as gas, electricity and the railways.
The first steel offering, United Steel, attracted 52,000 applications and was three times subscribed. Dealing opened at a premium, but this quickly disappeared and shares were soon at a discount. Analysts blamed over-allocation to institutional investors who promptly sold because of fears of renationalisation. But a bull market was brewing and the subsequent sale of Colvilles attracted 150,000 applications.
Renationalisation occurred under Labour in 1967, followed by a string of nationalisations of ailing firms and industries. In 1976 Britain experienced a fiscal crisis, being ignominiously bailed out by the IMF.
The terms of the rescue included the sale of part of the government’s shareholding in BP. There were 225,000 applications for the £564m of BP shares — the world’s largest equity offering to date — in June 1977. The offer was 3.7 times subscribed and there was an initial premium of 23%. The sale pointed the way, perhaps unintentionally, to the financial potential of privatisation.
The Thatcher administration of 1979 embarked tentatively on privatisation, with the aims of rolling back the state, promoting industrial efficiency and filling the coffers; the eight modest privatisations of 1979-83 raised £1.4m.
But privatisation was a major plank of the second Thatcher government of 1983-87, which conducted a dozen sales that generated £14.5bn. The third Conservative administration of 1987-92 saw the heyday of privatisation with 10 sales raising £32bn.
The £4bn British Telecom share sale in 1984 was of a different order of magnitude to previous privatisations.
It also had a new mission — the creation of a new class of share-owning citizens with an unprecedented media campaign to stimulate participation.
Applications for shares came in from 2.3 million individuals; the five-times subscribed shares soared to an 86% premium. The next milestone was the £5.4bn British Gas offering in 1986 that was also aimed at individual investors through the ubiquitous “Tell Sid” campaign; two-times subscribed, shares leapt to a 25% initial premium.
The £7.2bn sale of the final tranche of government BP shares — another world record — in October 1987 coincided with a stock market crash that sent BP’s share price plunging from 350p to 286p, way below the 330p underwriting price.
The thunderstruck underwriters, which faced potential losses of £1bn, clamoured for the issue to be pulled but Chancellor Nigel Lawson refused. Most of the 6 million individuals who registered an interest in buying sat on their cash; but bizarrely, no fewer than 250,000 carried on lemming-like to an immediate loss in what The Times called “the biggest flotation flop in history”.
The 1997 Conservative election manifesto trumpeted the rise in Britain’s private shareholders from 3 million in 1979 to 10 million — a fifth of the adult population.
Nevertheless, the proportion of shares owned by individual shareholders continued its long term decline: 1963, 54%; 1981, 28%; 1991, 20%; and 2010, 11%. The forthcoming Lloyds Bank offering will doubtless boost the shareholder headcount, though many will simply trouser the initial premium.
Virtually all privatisations, especially those aimed at individual shareholders, have risen to a significant initial premium. This is especially true of new introductions to the market, which are the most difficult to price.
Pressure tends towards caution and under-pricing, which minimises the risk that individual investors (voters) will sustain losses, encourages wider share ownership, and avoids the political embarrassment of a flop.
Studies estimate the average initial premium of British privatisations at 18%, with bonanza premiums including 73% for Rolls-Royce and 68% for British Airways. Shares in Royal Mail leapt by 38% on the first day of trading. The odds are that history will repeat itself, though perhaps more modestly, in the Lloyds Bank offering.
