Stags push Freeserve to 38% premium

MORE THAN two-thirds of the entire Freeserve share issue changed hands yesterday as Britain's largest ever Internet float soared to a 38 per cent premium on its first day of trading.

Measures put in place to prevent stagging failed spectacularly as more than 106 million of the 153 million shares issued were sold on the London market yesterday.

The sale of 15 per cent of Dixons' free Internet service provider had been eagerly awaited by investment bankers as the first real test of appetite for Internet stocks outside the US.

CSFB, the investment bank that handled the offering, was clearly annoyed as some institutions, which had pledged to be long-term holders in order to be sure of getting stock, flipped their allocations out into the market within minutes of trading going live in London and New York yesterday.

Retail stags, who subscribed with the clear intention of selling out immediately, would have made a profit of up to pounds 437 each depending on when they sold. The shares soared to a high of 237.5p within minutes of dealing starting at 2.30pm London time before settling back to close at 205.5p - still well above the 150p at which the shares were priced.

On the basis of yesterday's closing price, Freeserve is valued at just over pounds 2bn.

Although CSFB was clearly delighted by the take-up of the issue, the opening day premium was fairly modest by American standards where it is not unknown for shares to soar 200 per cent in value on their first day.

Because of the high level of demand - the offering was more than 30 times subscribed - the retail allocation was scaled back to a maximum of 500 shares for the 42,000 applicants who were either Freeserve subscribers or Dixons employees. The amount institutions received depended on the degree they were judged to be supportive in the long term by CSFB and Cazenove, who also sponsored the float - although on the basis of their behaviour yesterday some will be crossed off the list for the next Internet float.

Analysts said that given the small free float they thought it unlikely that the buying yesterday indicated any attempt by institutions to build a disclosable stake.

Elizabeth Klein, analyst at Barclays Stockbrokers, said she was disappointed at the degree to which the float was skewed towards the big institutions. "It was obviously most important to Freeserve to get a lot of institutional backing. Some retail investors are going to be very disappointed."

Miles Saltiel at WestLB Panmure, the stockbroker, said that he expected the shares to hold these levels for the first few weeks. In the longer term, however, he said the price depended on whether Freeserve could reduce "churn" in subscribers. "The issue has gone very well. But it faces competition. Management has to justify top-of-the-range valuations."

Yesterday's strong start for Freeserve will encourage those in the City who hope that the public offering will open the way to a raft of new Internet companies coming to market. However, James Leigh-Pemberton at CSFB pointed out that most of the Internet flotations in the pipeline, such as QXL and Exchange, are small by comparison and that investors may have to look to other European companies for the next Internet offering on the scale of Freeserve.