TSB's IPO

There’s another bonanza on the horizon but the only snag is that you have got to be pretty much a high roller to cruise this one all the way to the bank. Joe public, that’s me, can only watch with glee and perhaps pickup some crumbs later. This is all with reference to the Initial Public Offering (IPO) of TSB shares, the prospectus and price of which was published by Lloyds today.                    

Indeed, the tune sounds familiar; it starts typically with a bank, a financial crisis of 2008, then the bank goes cap in hand to the government for a chunk of money claiming it desperately needs it to keep afloat. So the bank gets nationalized, on the tax payers’ expense. Finally, there is an IPO, or a stock market launch where the shares are sold to the general public on the stock exchange.

But the Holy Grail is obtained when investors get in early at the offer price, which is the price before the shares start trading on the stock market. Quite literally vast fortunes can be made, over night, or in one trading day, for those investors who are able to buy in at this early stage, before the shares are traded on the market and available to the public.  The offer price, set typically just a few days before the IPO date, is the price paid by the big players, the institutional investors who commit to buy the shares at the offer price before the IPO. Trying to get in early at the offer price is like trying to gain access to Annabel’s, London most exclusive members only club. You need to be already high up the food chain. The stockbrokers, who are responsible for placing these shares, gauge with their best clients, usually investment banks, perhaps even a syndicate of investment banks, or extremely well heeled individuals, their interest in the shares at the potential offer price. This price in theory is determined by analysts who assess the business’s financial accounts to determine what the business is worth.

Where things tend to get skewed is when there is a revolving door, a movement of personnel between roles of politics and financial institution and regulator to benefit this exclusive closed circle of powerful and privileged individuals to the public’s detriment.

Take for example the pending public offering of TSB, which is worth 1.6 billion USD according to its net asset value (the value of the company’s assets minus its liabilities).  The bank already has 4.5 million customers and 6 percent of bank branches in the UK, making it Britain's seventh-largest retail bank in the country.  Yesterday morning Lloyds announced in a statement that it would set the price range for the TSB IPO at between 220p and 290p. That would give TSB a market capitalization (market share value multiplied by the number of shares in issue) of approximately £1.28 billion at the mid-point at the proposed offering. That would be £320,000,000 million below TSB’s book value, or net asset value (using the midpoint value).

So it becomes fairly apparent for all of us to understand that buying in at the offer price, before the shares start trading on the stock market usually means rich pickings for those investors in just a tremendously small amount of time. Put simply, these investors are fortunate enough to purchase an asset at well below its true value and then extract the surplus profits by selling out on the first day when the shares commence trading on the stock market. This is akin to buying a house below its market value, then flipping it to make a quick profit.

Admittedly, there is some element of risk when investors buy in at the offer price because they have agreed to purchase a large chunk of the shares at a pre determined price before they start trading on the stock market. Assuming that there is little or no public interest in the TSB public offering, then according to the simple laws of supply and demand the shares could fall to a level below the offer price. In theory that could leave the underwriters of TSB, particularly the main underwriters, with large losses on their hands.

This is somewhat the argument that city analysts have cited for undervaluing the TSB offer price, according to reports in the Times.  Apparently, there has been a deterioration in appetite for UK flotations in the second quarter of 2014. One unnamed source told The Telegraph that the TSB IPO was priced ‘to go’ with the range based on pre-road show conversations with investors from the UK, the US and Asia. Moreover, the TSB IPO has apparently already attracted significant demand from retail investors due to the banks simplistic and transparent business model, according to reports in the Telegraph. Furthermore, the share bonus scheme which enables retail investors to get one free share for every 20 shares they have purchased, but the only snag is that they have got to hold on to the shares for a period of one year after the floatation.

Therefore, with the TSB’s offer price valued well below the business’s value and apparent strong demand from retail investors, it stands to reasoning that the underwriters are likely to make huge profits on this one when the shares start trading in late June, albeit at the expense of the taxpaying public.

Joe public might also be able to pick some of the spoils, if this apparent strong demand actually materializes when the shares commence trading, but they will need to do so early through an intermediary, such as a stockbroker.  Lloyds will be announcing the final price for the TSB float on or around June 20, which will also be the date for conditional dealings on the London stock market  (the point when you may be able to trade via your broker).