Warburg is still up there at the top of the flops

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The Independent Online
IN OCTOBER 1994 in this newspaper we put the previous year's flotations under the microscope and found that no fewer than 77 out of 132 stock market debutantes were trading at a discount to their issue price. We then focused on the worst 50 flotation flops and the advisers to them. This unearthed the fact that Warburg was advisers to no fewer than five of them. We unofficially crowned the (then-pre-eminent) investment bank "top of the flops".

Warburg was furious, of course, and heaped scorn on our methodology. It also pointed to its recent flotation triumphs, drawing our attention in particular to a float it was especially proud of - one House of Fraser.

Fifteen months on, however, House of Fraser is, frankly, a mess. Last week it issued its fourth profits warning since it floated in March 1994. The shares plunged to below 150p but rallied to end the week 10p below the float price of 180p. They would be much lower, only the stock market now thinks the company is so badly managed it may attract a takeover bid.

This was not the only misfortune for Warburg - now SBC Warburg after its takeover by Swiss Bank Corporation. McBride, one of the biggest flotations of last year, also shocked the stock market with a profits warning last week. Shares in the detergent maker are now 38p below the issue price of 188p. Warburg was again the flotation sponsor.

Meanwhile, shares in Eurotunnel plunged to an all-time low of 77p as it emerged that the Channel Tunnel company had sought French government assistance to stave off bankruptcy. It was Warburg again, together with SBC, that 20 months ago helped Eurotunnel persuade its long-suffering shareholders to fork out 265p a share in a rescue rights issue.

And finally last week, shares in the cable companies took a battering (see page 6), none more so than Nynex CableComms whose shares slumped to 100p. These were the same shares that were offered for sale at 137p last June. Chief adviser on that flotation was Warburg.

The bankers at Finsbury Avenue will not comment on this singular track record. And fortunately for them, they have not yet been besmirched with a total flotation catastrophe such as MDIS or Aerostructures Hamble. The latest spate of disappointments may just be an unfortunate coincidence. But a few more weeks like last week and investors will start to look twice at share issues bearing the imprimatur of SBC Warburg.

It's their own fault

DON'T feel too sorry for British Gas. The company is in a pickle, locked into long-term contracts to buy gas it does not want at prices much higher than the going rate. The cost could be pounds 1.3bn over the next two years, maybe more. It wants someone else to pay for this financial calamity: taxpayers, gas users or the North Sea suppliers - anyone but itself.

It argues that it signed the bulk of these crippling contracts when it had a cast-iron monopoly and a statutory duty to supply everyone. At the time it was logical to lock into guaranteed supplies.

In fact, almost half the contracts were signed after privatisation in 1986, when the Government had spelt out how it wanted to introduce competition into the industrial and commercial gas market.

It continued to sign more contracts over the following eight years, despite obvious signs that the Government wanted to open up the industry to more competition.

Even in December 1993, when Michael Heseltine, then at the DTI, announced that the domestic market would also be opened up to competition, British Gas refused to see the writing on the wall. The last long-term contract was signed in the spring of 1994.

It is all very unfortunate for British Gas's 1.8 million shareholders, most of whom have been with the company since privatisation a decade ago. Their loyalty has been rewarded with a singularly pedestrian share price performance.

But there is no reason why gas consumers, taxpayers, or North Sea operators should compensate them for the management's poor judgement. If the spot gas price last year had doubled, instead of halving, Cedric Brown and his colleagues would now be looking very clever and would be making huge windfall profits from the contracts.

I wonder how willing they would be to share these goodies with their suppliers or customers or with the Exchequer if the gas price had gone the other way.

Woolwich up for grabs

WOOLWICH'S plan to shed its mutual status and float on the stock market is far from a foregone conclusion. For the next 18 months the building society is going to be highly vulnerable to a bid. Until last week, when it announced its intentions, it was reasonably safe from hostilities. Once it actually arrives on the stock market in the summer of 1997 it will again be safe, protected by a rule that limits any one shareholder to a 15 per cent stake.

In the meantime, however, it will be open season on the Woolwich, which has officially put itself "in play", in City parlance.

Many financial services companies will at least want to run a slide-rule over the business, egged on by corporate financiers who see the chance of a very big buck. Royal Bank of Scotland, BAT Industries and Abbey National are probably the most serious candidates. A flotation would value the business at pounds 2.5-pounds 3bn, so the Woolwich board would have to take any offer over pounds 3bn very seriously.

Although they see an independent quoted future as the best option, they are only too aware of the case last year of the National & Provincial. It rebuffed Abbey National's initial advances, only to have the wooing leaked. It was then forced to go back to the negotiating table. It held a full-scale auction, and ended up in the hands of the Abbey.

But there are two reasons why Woolwich may escape unscathed. The first is that it knows better than any outsider the real level of interest among predators, having received several tentative approaches. It would not be embarking on such a long-winded float plan if it did not believe it could escape unscathed. The second is the number of other societies still available to buyers. There are plenty more fish in the sea, starting with the Alliance & Leicester, poised to announce its own float plans within the next few weeks.

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