Essar’s IPO flops, and it could fall further

“London’s biggest flotation since the onset of the financial crisis has got off to a less than spectacular start”, says FT Alphaville’s Neil Hume.

In fact, that’s an understatement. It’s been a bit of a nightmare.

Essar Energy is an oil and gas producer being partly spun off by one of India’s largest conglomerates. But the IPO (initial public offering) price had to be cut at the last minute to pull in enough punters.

Instead of selling its shares at a price somewhere between 450p and 550p, the company ended up selling 300m shares (23.2%) at 420p/share. And now dealing in the shares has kicked off today, they’re standing another 5% lower even than the reduced IPO price.

To be fair to Essar Energy and its advisers at JPMorgan Cazenove, starting trading on a day the ‘Footsie’ is down 1.5% isn’t ideal.
But on the basis that it can often be right to buy shares the market doesn’t like, does this now mean that Essar is worth snapping up?

We’re not convinced. For one thing, we’re not too surprised the float has flopped. We expressed concerns about it two weeks ago, and it looks like potential investors share them.

Controlling shareholders the Ruia brothers – read more about them here – are keeping a near-77% stake. So minority shareholders might feel rather out on a limb.

On top of that, according to Hume, “non-public marketing research produced by JPMorgan Cazenove has warned investors of ‘a complex structure and a lack of clarity on the flow of funds between the UK unit and its Indian subsidiaries’.” Which sounds like another euphemism on the lines of ‘we can’t see precisely who owns what’.

And while these self-same advisers reckon Essar Energy will be on a p/e of seven by 2012, they admit that the current year multiple is 20, compared with the oil sector average of 15. Hmm.

In short, if you were tempted to buy in, don’t – Essar could still have further to fall.