Where Sid won and lost

Clifford German spots the lemons in the basket of privatisation stocks

Railtrack is the 41st public sector company to be sold off into the private sector in a process which goes back to the initial sale of a stake in BP as long ago as 1977, although it only really began in earnest in the Eighties after the election of Margaret Thatcher. Allowing for the fact that some companies have been sold in two or three or even four tranches, there have been 51 separate sales, and all but two are in the black.

But the basket of privatisation stocks contains a number of lemons as well as oranges. The best performers by far have been the early privatisation issues, led by BP, Associated British Ports and Cable & Wireless. All three were sold in stages and in all cases the early birds got the worm. The first tranches were sold off cheaply and the subsequent offerings were offered at higher prices.

Allowing for share splits and rights issues, investors paid the equivalent of 14p a share for AB Ports in February 1983. They now have an investment worth almost 300p a share, more than a twentyfold increase in 13 years. Those who bought the second tranche of shares at the equivalent of 33.75p in April 1984 have multiplied their money almost ninefold.

This is a recurring pattern. Cable & Wireless shares were sold off in three successive tranches at the equivalent of 28p in November 1981, 68.75p in November 1983 and 146.75p in March 1985. And at the current price of 535p each they have proved a good investment, although the returns on the second and third tranches are significantly less spectacular than the ones before.

Investors paid the equivalent of 70.4p a share for the first chunk of government shares in BP sold off in 1977, and they are now worth around 590p, an eightfold gain in 19 years. The next two chunks, sold in 1979 and 1983, have multiplied fourfold, but the fourth and final tranche, which was caught up in the great crash of October 1987, has taken nearly nine years to show an 80 per cent appreciation.

Two other early issues, British Aerospace and Amersham, the healthcare group, have done well by their backers, although the second tranche of BAe cost two-and-a-half times as much as the first. BAA and British Airways, which were not privatised until 1987, have also turned out to be a good investment, with shares now worth four-and-a-half times the issue prices - far ahead of the FTSE index, which has risen about 70 per cent over the same period.

The remaining issues in the Eighties have done significantly less well, however. British Steel, privatised at 125p a share in December 1988, now stands at around 200p, although the FTSE 100 index has more than doubled over the same period. Sid paid 135p for British Gas in December 1986, and although they hit 350p two years ago the shares now languish at 250p - an average growth of 9 per cent a year - and has significantly underperformed the stock market average of 15 per cent a year over the same period.

British Gas has taken some stick from the stock market in the past two years because of the huge long-term contracts to buy gas at prices above the current market level, but persistent investors in British Telecom have little more cause to congratulate themselves. Investors who got in during the first sale in December 1984 now have a stake worth nearly three times what they paid for it. But the second and third tranches have turned out to be poor investments. The second tranche is showing a gain of 12 per cent in over four years, and investors who paid the Government 410p a share for the third and final tranche in July 1993 are sitting on a loss of about 30p a share.

Rolls-Royce was sold off in May 1987, and until recently was showing a loss. A recent spurt has taken them up to 240p, but they have underperformed the market.

Privatisation got a second wind from November 1989 onwards, when the water and electricity industries were sold off. Both sectors have comfortably outperformed the stock market, but it has needed a massive injection of takeover interest to make investors feel they have done well.

Even so, performances have varied enormously. Investors in Norweb made a phenomenal profit, walking away with almost five times their original investment in five years when they were taken over by North West Water. Seeboard, Manweb, Eastern Electricity and South West Electricity have ridden on the same bandwagon, and Southern looks set to follow. Its shares are worth almost four times what they were when investors first subscribed for them in November 1990, over a period during which the FTSE 100 share index has risen no more than 80 per cent.

The remaining regional electricity companies, which have not yet attracted a bid, have done less well for their investors, but there is a bid premium in the price of most of them, and the poorest performer, East Midlands Electricity, has more than doubled their money. Most regional electricity shareholders have also had the benefit of shares in the National Grid, which has been demerged out of the collective ownership of the regionals.

The strong performances of National Power and PowerGen also owe a lot to bid prospects, although it is the same old familiar story in that the second tranches still lag well behind the performance of the first. Investors who bought the first tranches in March 1991 have seen their money multiply three-and-a-half times, more than twice as fast as the market as a whole. But the second tranches, sold off in February last year, are showing rises of only about a third.

Northern Ireland Electricity shares have doubled in three years without the benefit of a bid, but the booby prize in the electricity sector goes to Scotland. Until recently, the two Scottish electricity companies, Scottish Hydro and Scottish Power, have been rather dull performers, sold at 240p and now standing at about 368p and 400p respectively.

Water company shares, which were privatised in November 1989, have attracted less bid speculation and underperformed electricity in spite of their high yields, but bid activity has boosted values. Northumberland, Welsh Water and North West Water lead the pack, but even those companies which have not had a sniff of a bid have turned out to be good investments. Most of them have comfortably doubled in value, compared with a market average rise of about 75 per cent since 1989.

PRIVATISATION PROFITS: THE RECORD SINCE 1977

Company Issue date Price (p) Price now x growth % pa

Amersham Feb 82 142 1005 7.07 43

AB Ports 1. Feb 83 14 291 20.79 150

2. Apr 84 33.75 291 8.62 63

Brit Aerospace 1. Jul 81 150 878 5.85 33

2. Sep 85 375 878 2.34 12

BAA Jul 87 122.5 554 4.52 40

Brit Airways Feb 87 125 555 4.44 37

Brit Gas Dec 86 135 250 1.85 9

BP 1. Jun 77 70.4 589 8.37 39

2. Oct 79 121 589 4.87 23

3. Sept 83 145 589 4.06 24

4. Oct 87 330 589 1.78 9

Brit Steel Dec 88 125 198 1.59 8

BT 1. Dec 84 130 376 2.89 17

2. Dec 91 335 376 1.12 3

3. Jul 93 410 376 0.92 -3

Cable & Wire 1. Nov 81 28 535 19.11 125

2. Nov 83 68.75 535 7.78 54

3. Mar 85 146.75 535 3.65 26

Enterprise Oil Jun 84 185 441 2.38 12

Rolls Royce May 87 170 240 1.41 5

National Power 1. Mar 91 175 605 3.46 48

2. Feb 95 340 470 1.38 33

PowerGen 1. Mar 91 175 606 3.46 48

2. Feb 95 370 468 1.26 22

Scottish Power Jun 91 240 400 1.67 14

Scottish Hydro Jun 91 240 367 1.53 11

N Ireland Elect Jun 93 220 453 2.06 37

Eastern Electricity Nov 90 240 975* 4.06 63

E Midlands Nov 90 273 669 2.45 27

London Nov 90 280 855 3.05 38

Manweb Nov 90 240 990* 4.12 63

Midlands Nov 90 120 417 3.47 46

Northern Nov 90 240 719 2.99 37

Norweb Nov 90 240 1170* 4.87 77

Seeboard Nov 90 120 535* 4.46 68

Southern Nov 90 240 891 3.71 50

South Wales Nov 90 240 849 3.54 48

South Western Nov 90 240 965 4.02 62

Yorkshire Nov 90 240 874 3.64 49

National Grid Dec 95 204 198 0.97 -9

Anglia Water Nov 89 240 614 2.56 24

Northumberland W Nov 89 240 1179* 4.91 63

Northwest W Nov 89 240 627 2.61 25

Severn Trent W Nov 89 240 603 2.51 23

Southern W Nov 89 240 778 3.24 35

Southwest W Nov 89 240 717 2.99 31

Thames W Nov 89 240 584 2.43 22

Welsh W Nov 89 240 750 3.12 33

Wessex W Nov 89 240 362 1.51 8

Yorkshire W Nov 89 240 704 2.93 30

* takeover price

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