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Railtrack to pay pounds 65m sweetener

Extra dividend to woo railway investors will come from pre-flotation profits
THE Government is to pay out a surprise pounds 65m in extra dividends to new shareholders in Railtrack in a bid to ensure the success of the flotation, the centrepiece of its controversial railway privatisation programme.

In a novel tweak, investors buying shares in Railtrack will receive a final dividend payable for the period when the company was still in state hands.

According to one adviser on the pounds 1.8bn flotation, the total first-year return for private investors will be an enticing 15-20 per cent, after taking account of other perks and the gearing effect of the partly paid shares.

The extra sweetener is likely to fan accusations that Railtrack, which owns the track and stations and operates the signalling of the entire network, is being sold too cheaply and that taxpayers are being shortchanged. Paying a dividend to new shareholders out of profits earned in the pre- flotation period is unprecedented.

However, advisers to the issue argue that the largesse will at least be partly paid back because it will entice more institutional shareholders and therefore enable the issue price to be set higher than otherwise.

The minimum initial investment has also been set comparatively low, at pounds 400. Investors will have to pay a second pounds 400 instalment a year later. The global co-ordinator, SBC Warburg, envisages 30 per cent of the shares going to small investors.

The pathfinder prospectus tomorrow will also reveal that 100 per cent of Railtrack is to be sold and that there will be no "golden share" to prevent foreign companies launching a bid.

The accident-prone privatisation wobbled again last week with the resignation of Roger Salmon, the official in charge of selling rail franchises.

Despite all the problems, the advisers believe investors will see Railtrack as a potentially attractive investment. Its revenues are virtually assured because of long-term government subsidies to its customers, the train operating companies, and there is considerable scope for cost cutting. The share price is expected to be set so that Railtrack yields 6.8 to 6.9 per cent - on a par with a similar utility stock such as the National Grid.

Private investors will pay less for the shares than institutional shareholders. Last week Railtrack announced loyalty bonuses for small investors in the form of bonus shares or a discount on the second instalment.

At least some institutional investors are yet to be convinced of the merits of the company. One said it was concerned that the new rail structure wasuntested. Fewer train operating companies had been franchised out than originally envisaged. There was also the uncertainty about how a Labour government would treat Railtrack.

The institution was also concerned about the lack of independent analysis. Most published analysis has been done by investment houses linked to the float. These include the three global managers, SBC Warburg, Merrill Lynch and Union Bank of Switzerland, and the six co-managers, which include Credit Lyonnais Laing, Fleming's, James Capel and Nikko.

The prospectus is expected to reveal for the first time how Railtrack is faring under the new performance regime, in which it makes penalty payments to train operators when delays are its fault. Railtrack set aside pounds 84m for such fines in the last year.

This week Railtrack's executive chairman, Bob Horton, begins a month of investor roadshows in Britain, the US andEurope to entice institutional investors.

Small investors have to register with a share shop by late April to qualify for additional perks. On 1 May SBC Warburg announces a price range for the shares, and the formal "bookbuilding" - a process whereby institutions indicate their level of interest in the issue - begins the following day. The public offer closes on 15 May. The issue price and allocation of shares is decided on the weekend of 18-19 May and, if necessary, applications are scaled back. Dealing begins on 20 May.

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