View from City Road: New issue fever cools

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The Independent Online
Whisper it softly, but the new issues gravy train looks as if it could be running out of steam. The reaction to the three companies that started dealings yesterday suggests investors are starting to look more closely at where they put their money.

Worst were Canadian Pizza, which ended 1p below its 200p offer price, and CLM Insurance, 1.5p below. But Gartmore also found it hard to rise above its issue price. There have been other straws in the wind: Charles Sidney had a turbulent first day, although it is currently trading 6p above the offer. The public offer for DFS was only 1.3 times subscribed, suggesting little profit for stags when dealings start on Wednesday.

The cooling of new issue fever partly reflects what is happening in the markets. While shares have recovered most of the ground they lost in the 63-point fall two weeks ago, investors are more nervous than they were earlier in the autumn, and are likely to remain so until after the Budget. That is bad news for the merchant banks, which have to set prices then cross their fingers for up to two weeks.

But it also suggests that sponsors will have to be less greedy. Some of the issues have been priced on fairly heady multiples - Gartmore, for example, was 20.7 times 1993 earnings, while DFS was on a historic p/e of 19.7. Investors have also worked out that if venture capitalists think this is such a good time to sell out, it is not necessarily an equally good time to buy. And they are asking for lower multiples before they will pledge their support. With 116 public flotations, raising pounds 3.2bn, in the first 10 months of the year, they can afford to be more choosy.

Companies such as Forte and House of Fraser that are planning flotations early next year should take note.