Saturday 18 May 1996
With this weekend's final pricing of the Railtrack issue, and the British Energy flotation now also within sight, the great privatisation marketing machine is back in action, to prove Mr Lynch's point all over again. Selling big state-owned companies on the stock market in the teeth of what apear to be extreme obstacles has been one of the Thatcher government's most enduring achievements. The fees the City investment bankers make selling its expertise in this area to foreign governments runs into tens, if not hundreds, of millions of pounds a year.
There seems little doubt that the Railtrack flotation will again confound the sceptics by being a success. By pricing the shares at a giveaway price, the Government has in effect guaranteed the success of the flotation, at least in the short term. There will be some handsome capital gains to be made, as well as a tempting yield of more than 20 per cent once all the incentives are factored in.
If past experience is any guide, the lure of easy money will draw in hundreds of thousands of private investors - although the absolute sums they make in the short run will be limited to a few hundred pounds at most once the applications have been scaled back. And as the institutions will be short of the stock once the issue is completed next week, there should also be a reasonable performance in the market in the months ahead, despite the prospect of a Labour government.
The Railtrack flotation demonstrates that it is possible to sell even a chronically loss-making business if the seller wants to sell it badly enough. In the case of Railtrack, for the foreseeable future the company's earnings will come (in effect) from subsidies paid by taxpayers to the country's newly franchised train operating companies.
Only the Post Office and British Nuclear Fuels among the big nationalised industries have proved to be unsaleable - although both of them would re-emerge as candidates in the event of the Major government winning the next election.
For investors, the privatisation programme has been mostly unalloyed good news. Anyone who bought the lot when they were first sold would have comfortably outperformed the market as a whole. Anyone who wants to have a diversified portfolio of stock market investments can hardly now do so without holding a least a few privatisation issues.
lt has certainly changed the face of stock market investment in this country. By my reckoning, no fewer than 17 of the 100 stocks in the Footsie index are now privatisation issues. According to BZW's Company Digest, these 17 companies had a combined market capitalisation of more than pounds 90bn at the end of the first quarter of this year. That's equivalent to 16 per cent of the value of the Footsie index. Given the scale of the transfer of assets from public to private sector, and the big changes that have accompanied privatisation in most of the industries, it has been little short of a revolutionary change.
All of the privatised companies have produced gains in the short term. That is the result of two main factors: being sold cheaply and being able to make the obvious gains in productivity and efficiency once freed of state control. But the longer-term performance has been much more mixed.
In fact, looking through the lists, the disparity in performance is striking. There has been little to match the regional electricity companies for sustained share price performance, but many of the others have also produced above-average returns. Most of the companies have profit margins that are higher than the market as a whole - a testament to the fact that regulation and competition have still to make as much impact as they could.
The ones that have done best, however, are those that not only have benefited from the one-off gains in efficiency and productivity that private sector freedom makes possible, but also have strong underlying economics. Two that stand out are BAA - the airports authority, with its monopoly on airport sales - and British Airways. They both have strong market positions in what is fundamentally a growth business.
By contrast, the companies that have done less well relative to the market as a whole are those operating in cyclical, capital-intensive or competitive businesses where growth is much harder to come by. Rolls-Royce, British Steel and, to a lesser extent, British Aerospace have all suffered from being in industries with poor economic characteristics. British Gas is in a growth sector but has been a victim of poor commercial judgement and a hostile regulator.
The moral for investors is clear. Privatisation can and does bring big short-term gains in efficiency. But in the longer run, no amount of efficiency gains can turn a business with lousy economics into a good one. The best way to make money out of equities remains the simplest: buy into shares with a strong market position and sustainable earnings growth.
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