Base rate fears fuelled by pounds 6bn windfall
Tuesday 15 April 1997
This emerged yesterday as the Alliance and Leicester disclosed that 27.5 per cent of the shares being given away to savers and borrowers in next week's pounds 2.3bn flotation are being cashed in immediately.
If similar numbers of shares in the other floating mutual societies are sold instantly then it will free up pounds 6.3bn of spending power - the eqivalent of 3p off income tax, 0.8 per cent on GDP and 1.2 per cent on annual consumer spending.
The impact on the economy could be significantly greater if more of the new building society shareholders decide to cash in through the course of the year - adding dramatically to growth and fuelling inflation.
The 27.5 per cent of A&L shareholders cashing in is higher than most City analysts had forecast. A study by Mori for the investment bank Salomon Brothers in February estimated that only 12 per cent - one in eight - would sell shares immediately with a further 12 per cent selling shares later in the year.
The Bank of England, meanwhile, warned in its February Inflation Report that if more than 10 per cent of the windfall was spent in the first year it would increase the upside risks on growth and inflation.
The A&L flotation, together with the forthcoming conversions of the Halifax, the Norwich Union, the Woolwich, and the Northern Rock together with the Bank of Ireland's takeover of the Bristol and West will produce a windfall of about pounds 23bn and benefit 19 million people - one third of the adult population.
Even if half the windfall is saved, it will still amount to a massive boost to the economy. Michael Saunders of Salomons. said: "This is a bigger figure than we had forecast. The key will be whether a lot more shares are sold and what the impact on spending will be. The thing to bear in mind is that of those people who sell their shares, only half will spend the money. The rest will be put into Tessas or PEPsor National Savings or used to pay off debt or they may even re-invest it in other mutual societies in the hope of cashing in again.
The proportion of A&L shares being cashed in immediately suggests that 640,000 of its 2.4m members are baling out. They will be left with around pounds 650m of cash burning a hole in their pockets.
It means around 160m shares will be available to meet demand from institutional investors by the time trading in the shares starts on Monday. With the market as whole sliding the chances of the shares trading above 500p next week are decreasing.
When the Abbey National converted to a bank in 1989 only a quarter of its sharehgolders balewd out in the first year. Roughly 25 per cent of National & Provincial members have also sold their shares in the nine months since their society was taken over by Abbey National last summer.
A&L points out that it has been a society for small savers, for whom a four-figure windfall was maybe too tempting to keep. More than 70 per cent of its members had less than pounds 2,000 on deposit, which is why it decided to go for a flat 250 share allocation rather than a graduated pay-out. The wording of its information leaflets sent to members was specifically designed to be even-handed but this may also have made it much easier to choose to sell the shares.
But uncertainty over the future trend of interest rates and share prices and the background of the election might have persuaded some members to take the cash against the advice of the City.
The higher than expected figure of sales means there is less risk of a disorderly market developing as institutions struggle for shares. Tracker funds will expect to hold up to 15 per cent of the shares eventually and other institutional investors to hold up to half. But A&L is not expected to join the FTSE100 index until 23 June.
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