City: Vital issue

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The Independent Online
HAVING narrowly avoided one crisis, the stock market has the prospect of another this Friday: the pounds 3bn Wellcome share issue.

There is a lot hanging on this. If it goes well, investors should recover some of the confidence they have lost over the last few weeks. If it flops, the market could get very bloody indeed.

Nerves are already badly frayed. Share prices were falling on Friday and look set to weaken again this week. Analysts are still manfully sticking to their forecasts of 2,800 on the FTSE 100 index by the end of the year, but there is a strained and irritated note in their voices when you ask them about it.

The market has already suffered four share issue flops in the last few weeks. Another on the scale of Wellcome, and the market's fragile nerves might crack.

As far as Wellcome itself goes, you can hardly fault the company: very good earnings prospects, strong defensive qualities, good management. The real problem is the state of the stock market and the structure of the issue.

You could hardly have chosen a worse time for such a large share sale. As well as the share issue disasters, there appears to be a kind of buying strike among investors, stock market volumes are dismally low, sentiment is volatile.

Worse still, the issue is being done as a bookbuilding exercise. Instead of underwriting - which would probably have been impossible in this case, anyway - bookbuilding involves complex bargaining with investors over price right up to the closing moment of the issue. That works fine in a strong market, and it saves a lot in underwriting fees. But when you have a market as thin and volatile as now, when sentiment is highly fickle, it is only slightly less dangerous than juggling with chainsaws.

During the attempted GPA share issue a month ago (another bookbuilding exercise), investors were told by Goldman Sachs and Nomura that demand was strong, which turned out to be utterly misleading. Anxious to avoid a similar embarrassment, Robert Fleming, the merchant bank handling Wellcome, is trying not to sound too gung-ho. Applications already received, it says, cover two thirds of the issue, with strong demand from the UK. These can always be withdrawn, however, before Friday. Interest from the US has also been slower in coming. It may or may not be an ominous sign that Flemings have stepped up the number of roadshows over the last few days to stimulate more investor demand.

At the moment, UK institutions are bidding in a price range between about 830p and 850p - a decent discount to the market price of 870p. Initial bids are coming in low because under Fleming's system, early applicants get preferential treatment in the allocation. They lose that advantage if they lower their initial bid but not if they raise it - so it's better to start low. Flemings will try to bargain them up as the offer closes, but in the current market investors are unlikely to play ball.

Wellcome Trust, the seller, has two other cards. Because it is not aiming to raise a specific amount of money it can scale back the issue substantially to fit demand if necessary. And because it is simply reallocating its assets away from the drug company into the equity and bond markets, it can be very flexible on price. What matters is the issue price relative to the rest of the stock market, not an absolute target price for the shares.

In the meantime, Wellcome can only wait and cross its fingers that nothing scares the market over the next week. Investors should want this stock. But that doesn't mean when the crunch comes, they will go for it.

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