Privatisations are normally good opportunities for private investors to make a quick buck.
So you may be pleased to learn that the government is contemplating three further privatisations during the next two to three years, hoping to keep the ‘feel-good’ factor going.
Which companies look set to fall under the hammer? And will they make private investors the sorts of quick profits we’ve seen from Royal Mail?
A piece of family silver you may not have heard of
Let’s start with the least well-known of the three potential privatisations, Urenco.
This company enriches uranium for use in nuclear power plants. It’s the second-biggest uranium enrichment business in the world with a 30% global market share.
What’s more, the company made a post-tax profit of €402m last year, up 12% on the year before, and has been investing in new capacity.
On the downside, the Fukushima accident delivered a massive blow to the nuclear power industries in Japan and Germany, so Urenco won’t get any growth from those markets.
However, there’s a good chance that some of the emerging market economies – such as China and India – will want to keep building new power stations, and so become Urenco customers.
The British and Dutch governments each own a third of the company, while the final third is split between the German utilities, E.On and RWE. If the government does sell our share, it could deliver a £3bn windfall.
Ordinary investors might be frozen out of this privatisation. A trade sale is possible. Aveva, the French nuclear services group, is one potential buyer.
But if we see a conventional IPO (initial public offering), there could be plenty of demand. Of course, that would depend on the IPO price, but the government will probably price the business at an attractive level. After all, that’s what normally happens!
(My colleague Merryn Somerset Webb wrote last week about just how poor governments have been at pricing these privatisations over the years – Royal Mail is far from unique).
"The only financial publication I could not be without."
John Lang, Director, Tower Hill Associates Ltd
The return of the banks
Lloyds Banking Group (LSE: LLOY) differs from many previous privatisations in that the government has never owned a majority stake in the bank.
Indeed the government sold a 6% stake in Lloyds last month to institutional investors while retaining a 32% holding.
Next year, the government will almost certainly sell some shares to private investors via a ‘retail offer’.
However, this is one occasion when making a quick buck from the sell-off might not be quite such a sure thing. You see, because Lloyds shares are already traded on the stock market, it should be relatively easy for the government’s advisers to value the bank.
That means it could be hard for the government to get away with selling shares at a heavily discounted price. That’s bad news for anyone who hopes to make a quick short-term profit from the offer, but it’s good news for taxpayers. We won’t get a poor price for the asset.
Looking beyond the short term, you can make a plausible case for Lloyds as an attractive investment. Chancellor George Osborne is determined to stoke a pre-election boom. As a UK-focused business, Lloyds should benefit from that.
So the more optimistic you are about the UK economy (even if in the short term), the more attractive Lloyds becomes.
But I have to admit, I very much doubt I’ll apply for shares myself. The financial crisis scarred me – I’m painfully aware how hard it is to judge the quality of a bank’s loan book. So, regardless of any pick-up in the UK economy, I’d rather take my chances elsewhere.
Don’t expect this one to limp back to market before the election
The government has a much a bigger stake in Royal Bank of Scotland (LSE: RBS) than Lloyds – 81%. That reflects the fact that RBS was in an even bigger mess in 2008 than Lloyds.
Osborne recently confirmed that RBS will be split into a ‘bad bank’ with all of the poor quality loans, and a ‘good bank’ that would be left in a position to prosper.
There won’t be any share sale before the election here. It’s just not ready. And I certainly wouldn’t be tempted to buy shares in RBS at the current price. As with Lloyds, I worry about unknown ‘nasties’ lurking around, and it looks likely that the banks will have to increase their provisions for mis-selling interest rate ‘swap’ products to businesses.
So of the three potential share sales, Urenco is the most likely to offer an opportunity for a quick profit, assuming it’s not sold to a trade buyer.
However, overall I’m close to certain that Royal Mail will prove to have been the most attractive privatisation of this decade. And even then, I’m not convinced it’s a great long-term bet. If you still have Royal Mail shares now, my view is still that you should think about selling them.
And just before I go, speaking of making quick profits, I’ve been reading up on an interesting idea from one of our newsletter writers. We’ll be sending you an email about it at the weekend – it’s a high-risk, high-reward opportunity, so if that’s the kind of thing that interests you, keep an eye out for it.
Our recommended articles for today
The environment for investors is the most challenging for decades as governments and central banks distort the markets. Here, Tim Price explains what you should do to protect your wealth.
Forget market volatility. Good-quality growth stocks will reward patient investors in the long run. David Thornton explains where to find them.
New to MoneyWeek?
Welcome, and thank you for visiting us.
Here at MoneyWeek, our aim is simple. To give you intelligent and enjoyable commentary on the most important financial stories of the week, and tell you how to profit from them.
If you've enjoyed what you've read so far, I've got something you'll definitely be interested in.
Every working day the MoneyWeek team sends out a hard-hitting email, 'Money Morning', giving you a rundown of the latest financial events, and revealing what you should do to maximise profits and head off losses…
And with your permission, I'd like to send you Money Morning for FREE.
To sign-up enter your email address below.
We hope you enjoy your stay on the site. Good luck with your investments!
Digital Managing Editor, MoneyWeek