View from City Road: Wellcome draws a risky line

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The Independent Online
CUTTING off the bidding for Wellcome shares at 800p is brave. While the move appears confident and might be expected to boost the proceeds of the share sale, the effect could be the opposite. It could result in Wellcome Trust, a medical research charity, raising less money than it hoped.

If it sells about 260 million shares, compared with the target of 330 million, it will only raise pounds 2.1bn at 810p. That is far less than originally expected.

With another day's dealing still to go, investors have still to fine-tune their bids. But many were planning to bid at 790p a share until yesterday's announcement. Will they increase their bids or will they withdraw?

The price has come down from more than 900p when the sale was announced. Advisers to Wellcome Trust reckon this is because some individual investors, whom they have identified, have sold shares short. Such selling must have taken place soon after news of the sale in March, because the price has outperformed more recently.

Even before yesterday's announcement, a number of British investors were shunning the issue. Most indexed funds already have all the exposure they need so they were not interested. And at least two large investors, with pounds 12bn under management between them, have decided not to bid for stock. Overseas take-up is hard to gauge but could be muted given that Wellcome is less well known than many other pharmaceutical stocks.

If the shares are sold at 810p, which looks possible, it would represent a discount of 2.5 per cent to yesterday's market price of 830p, up 1p. The commission paid to Robert Fleming, the global co-ordinator, and the other advisers will take a further 3.5 per cent to 3.75 per cent of the proceeds, worth about pounds 95m. Nice work if you can get it.

These costs may look high but they are probably lower than the costs of a traditional fixed-price offer. This would have involved 2 per cent underwriting fees but a much bigger discount of, say, 10 per cent to allow for volatile markets. Success for Wellcome could mean book-building is here to stay.