View from City Road: Offset hides MFI's flop

IN ANYBODY'S terminology, the flotation of MFI Furniture Group was a flop. Even with the shares at the discount price of 115p, the sub-underwriters ended up with 85 per cent of the shares on offer to the public.

So why were MFI's merchant bankers, County Natwest, claiming yesterday that 44 per cent of the offer was taken up and on Friday that it 'was not mega-undersubscribed'? Because 29 per cent of the shares have been subscribed for by sub-underwriters - institutional investors who agree to take up any shares left on the issuer's hands - in an offset deal.

The offset works like this. Sub-underwriters who definitely want to buy shares in a company being floated subscribe for the shares and this is subtracted from their sub- underwriting commitment on a pound-for- pound basis. However, they still receive their fee, equal to 1.25 per cent of the amount they underwrite. In MFI's case this means that institutional investors will receive pounds 571,000 for agreeing to buy shares which they wanted to buy anyway.

The whole thing seems like money for old rope. And it is. It also enables the merchant bank to present a rosier picture of an issue than it would have if the sub-underwriters had just received the shares in the normal fashion. County was fairly open about this yesterday, but N M Rothschild, which floated Anglian Windows last week, was initially not so forthcoming about the sub-underwriters' offset in its subscription figures.

The Office of Fair Trading is considering whether to make its investigation into underwriting more formal. The strange case of sub-underwriting offset should help it make up its mind.