Freeserve fast buck lures the stags back

News Analysis: The Internet service provider floats on Monday; its share price will soar
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The Independent Online
PREDICTIONS THAT shares in Freeserve, the free Internet service provider, will soar to a huge premium when they start trading on Monday is leading many institutional investors to consider "stagging" the issue.

The return of "stagging", where investors buy shares in new issues with a view to selling them straight away at a premium, has not been seen in Britain since the wave of privatisations in the 1980s.

Then the flotations were seen as a copper bottomed chance to make a fast buck from established utilities, often with monopoly positions, such as British Telecom and British Gas. Private investors would regularly queue outside their banks in order to rush their applications forms in before the deadline.

Many would make multiple applications or subscribe for far more shares than they expected to receive because they knew their allocations would be scaled back due to huge demand. Many retail investors sold their shares quickly even though their performance since has shown they would have been best advised to keep them. This time around it will be slightly different. If Freeserve proves an initial success enabling investors to make an immediate return, the floodgates will open to a deluge of copycat flotations of Internet ventures with little or no profits and brief trading records. There will be significantly more risk attached.

One institutional investorsaid: "With people talking about a 20-30 per cent opening premium [for Freeserve] it was difficult not to apply. But is an appropriate longer term investment? Not really. It is expensive and the business model is not robust." The fund manager said that if investors have their shareholdings scaled back and the shares soar on opening dealings, "they could turf the shares out immediately".

Figures being quoted in the grey market for Freeserve shares yesterday show the shares trading between 185p-193p per share. This compares with the indicative price range of 130p-150p, which values Freeserve at around pounds 1.5bn.

With Dixons, the electrical retailer, only floating 20 per cent of Freeserve, the lack of stock available is likely to lead to a huge level of over- subscription, with investors' holdings being substantially scaled back.

There has even been talk in the market that Mercury Asset Management, Dixons' largest single shareholder, was attempting to buy the entire free float of Freeserve's shares.

Applications for both retail and institutional investors closed yesterday but Freeserve will only disclose the level of applications on Monday when the shares start trading. The start of dealings will be delayed until 2.30pm on the London Stock Exchange to coincide with the opening of the New York Stock Exchange where the shares will also be listed.

Colin Wood of Standard Life said: "There does seem to be talk of stagging around. But normally it is the retail investors who do that with the institutions mopping up their shares."

Standard Life is positive on Freeserve's prospects. "We like it and have subscribed. We were attracted by Freeserve's large market share. That and its ability to distribute the discs through the Dixons stores, provides a barrier to entry," he said.

John Hatherly, head of research at M&G, said: "The proposition is interesting and it is the first float of its type here." He predicted "huge demand".

Phillips & Drew, however, has spurned the issue. "People are buying Freeserve because they think it [the price] will be squeezed up not because they believe in it," one P&D fund manager said.

Freeserve said that, while demand has been huge, the possibility of over- eager punters making multiple applications has been reduced by Freeserve's insistence that investors register their interest online. This allows the company to check whether more than one application has been made from the same address. The submission of multiple applications was also made illegal at the end of the 1980s after the practice became widespread during the privatisation boom.

If nothing else, this float shows that, if properly marketed, retail flotations can excite huge levels of demand. This matching of buyers and sellers is something the London Stock Exchange has been slow to encourage in sectors such as information technology.

It was only in January that the exchange made an amendment to the Yellow Book stating that companies could seek an exemption to the rule that they must have a three-year trading record to qualify for a full listing. Freeserve is the first major float to take advantage of that change.

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