Banks' Grip on U.K. IPOs Loosens
(Bloomberg) -- The days of a huge first-day share pop may be coming to an end for London IPOs.
From this week, bankers managing initial public offerings in the U.K. face new rules designed to reduce their influence after a series of high-profile stock sales that were perceived as mispriced. The key issue is giving stock buyers and neutral analysts enough time with financial information to think about what the true price should be.
As things stand, analysts at banks running a share sale get access to the company’s books well before “unconnected” analysts, who get a prospectus only shortly before the sale. Under rules from the Financial Conduct Authority that apply from July 1, investors and analysts will get much earlier access to key information.
“It’s a helpful reform and it’s being done for the right reasons,” said Mark Phelps, chief investment officer of global concentrated equities at AllianceBernstein in London. “The buy side is always skeptical of sell-side analysts working for the company on an IPO. In all the years I’ve been doing this, I’ve never seen a negative report from a connected party.”
Commodities giant Glencore International Plc hired 23 banks to take it public in 2011. The stock is more than 30 percent below its IPO price after peaking shortly after the sale..
An opposite situation occurred during the privatization of Royal Mail Plc in October 2013. The threat of a strike prompted a valuation that was shown to be too low after the stock, priced at 330 pence, jumped almost 40 percent on the first day of trading. It continued to rise thereafter, prompting accusations the banks had sold public assets to their friends in the City on the cheap.
“It appears that the taxpayer has missed out on significant value,” lawmakers wrote in a report on the sale.
Under the new framework, companies will first have to publish a registration document similar to the draft they publish today and hold a presentation. The material used in the presentation must be given to “unconnected” analysts, either by allowing them into the event or by making it available afterward. The banks’ “connected” analysts won’t be able to publish their reports until unconnected analysts have had at least seven days to examine the company.
“We welcome the changes that reinforce the important role of a prospectus in the IPO process,” a spokesman from the LSE said in a statement. “Earlier publication should help broaden investor participation, particularly from retail investors.”
Some observers say the changes may not make much difference. As well, they could boost the burden of going public, according to Nicholas Holmes, a capital markets partner at law firm Ashurst LLP.
“There will certainly be more expense, but there’s no certainty of a deal,” Holmes said. “I’m skeptical there are armies of analysts out there ready to comment on deals.”
Smaller companies will probably be traded mostly by the brokers that take them public, and given those firms will pocket the commissions, there’s not much incentive for unconnected firms to put in the effort involved in starting analyst coverage, he said.
The rules won’t yet apply to the type of market known as multilateral trading facilities, such as London Stock Exchange Group Plc’s junior Alternative Investment Market, or AIM. “We encourage banks managing an offering on MTFs to consider adopting the reformed practice used on regulated markets,” the Financial Conduct Authority said.
“Small companies may find it harder to get any analyst coverage at all,” said David Lloyd-Seed, chairman of the IR Society and director of investor relations at Telefonica SA’s British arm, O2. “There may not actually be any unconnected analysts, so I’m not sure the IPO rules will change things significantly.”
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