MAM slashes Cairn issue fees

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The Independent Online
Signs of emerging price competition in the City's underwriting markets came yesterday when Mercury Asset Management took on the entire sub-underwriting for a pounds 50m rights issue by Cairn Energy at a cut-price fee.

MAM, the City's largest fund managers, charged the oil exploration company 0.5 per cent, far less than the standard fee for sub-underwriting of 1.25 per cent. It also said it would take the stock on to its own books at the market price of 280p on Wednesday ahead of the announcement, rather than at the usual discount. MAM's funds already own 11 per cent of Cairn.

MAM is one of the staunchest City campaigners to preserve the traditional underwritten rights issue against new methods of raising capital promoted by some big investment banks.

These banks would like to water down or abolish pre-emption rights for existing shareholders and sell new share issues by book-building or bought deals, in which they take all the stock on their own books.

The rights issue underwriting system favoured by MAM and its allies has been under pressure after an Office of Fair Trading inquiry commissioned from London Business School found the City overcharged heavily for its underwriting services.

A follow-up inquiry by the Bank of England disputed the scale of the excess fees but acknowledged that the problem existed.

The OFT urged companies to put pressure on the City to cut underwriting fees and introduce more competition into the market place but there have been few signs of breakdown in the 40-year-old fee structure, which allocates 0.5 per cent of the proceeds to the advisers, 0.25 per cent to the brokers and 1.25 per cent to the sub-underwriters.

In the background is a threat by the OFT to refer the whole question of underwriting fees and the cost of raising capital to the Monopolies and Mergers Commission this autumn.

There appeared to be no danger of MAM being left with the stock. The shares rose 38p to 318p after the announcement. Deutsche Morgan Grenfell is the adviser on the one-for-five rights issue at 280p.