Engineering company shows the way with no-underwriters rights issue

The practice of charging companies fixed fees to raise money in the City looks on the way out after an engineering company yesterday launched a rights issue dispensing with underwriting fees altogether.

The move comes just two weeks after John Bridgeman, Director General of the Office of Fair Trading (OFT), referred the issue of underwriting services to the Monopolies and Mergers Commission, on the grounds that the system is anti-competitive.

Heat treatment specialist Bodycote will raise pounds 99.3 million in a one- for-four rights issue priced at 500p a share - a 47.5 per cent discount to the prevailing market price - to help pay for its pounds 60.7m acquisition of French group HIT. Pricing the issue at such a large discount removes the need for underwriting, where institutional shareholders guarantee to buy shares at the issue price even if the company's share price falls below it.

As a result Bodycote, which was advised by Dresdner Kleinwort Benson, does not have to pay the standard underwriting fee of 2 per cent of the amount raised. "It was a case of saving pounds 2m, which is a very attractive proposition for a company like ours," said managing director John Chesworth.

The move was generally welcomed in the City. "It's throwing down a gauntlet to the traditional system," said one institutional investor. "It was bound to happen sooner or later," another investment banker said.

The issue is believed to be the first in recent years where a financially sound company dispenses with underwriting fees. Previously, investment banks had sought to cut fees by putting part of the underwriting out to tender.

John Rogers, director of investment services at the National Association of Pension Funds, said: "It shows that there is flexibility in the London underwriting market." Most observers said there was no reason why other companies should not adopt a similar approach.

The OFT was also positive. "This is just the sort of thing the Director General was looking for," said a spokesman.

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