Ocado and Sports Direct: better to arrive late than not at all
Whenever bankers are asked to explain why London’s market for new issues – the IPO market – nearly collapsed altogether last year, they cite a number of factors that always include the poor performance of a number of high-profile flotations.
The lists are long and varied but almost everybody’s bete noirs include Sports Direct, Mike Ashley’s competitively priced discount chain and Ocado, the online retailer.
The flotations were three years apart, with Sports Direct going public in 2007 and Ocado being unleashed on the public markets in 2010.
Both, however, spectacularly underperformed in terms of share price performance immediately after flotation, leading to criticism of the investment banks that brought the companies to market. They were Bank of America Merrill Lynch and Goldman Sachs respectively.
Now things are beginning to look rather different. Sports Direct, which is enjoying a spectacular trading record, is likely to break into the FTSE 100 for the first time in the coming days. Its shares, which were issued at 300p in 2007, are now trading at close to 670p, valuing the group at around £4bn.
Ocado, whose shares were listed at 180p – they were languishing at less than 80p two years later – has been massively boosted by a licensing deal with Morrisons, which has changed sentiment totally.
Shares are now trading at 291p with brokers such as Numis setting a target price as high as 380p on hope its leading technology can help it win partnerships with other global retailers.
So are there any lessons to be learnt by the experiences of these two groups, which have helped to colour the backdrop to the IPO scene in London.
In retrospect, the advisers to both groups would probably admit that, even though they might think they valued the equity of both groups correctly, they or the selling shareholders maybe should not have tried to extract maximum value all at the time of the flotation.
Better to behave like Cinven, for example, in the disposal of part of its stake in the recent IPO of Partnership, the insurance group. Cinven was advised, say sources, that it could have extracted a higher price for the sale of a portion of shares in Partnership but decided against going for the maximum price because it still had more shares to sell at a later date and preferred to have a strong aftermarket.
The decision looks to have been a wise one, with Partnership shares debuting strongly and continuing to perform well. They are currently trading at around 470p against a 385p flotation price, helping to give confidence to the IPO market as a whole.
Indeed, companies wishing to float in London need to bear in mind that many of the institutional buyers, like Andy Brough of Schroders, believe they need some sort of discount to entice them into buying into a new, unproven company. That might not be palatable but it’s a view that is difficult to ignore totally (unless one chooses to float in another jurisdiction entirely).
There’s also a case for inviting analysts from non-connected banks in to meet management ahead of a flotation. That way, there’s a good chance of avoiding the situation that Ocado faced when all third party research, which had been excluded from meetings (as is often the case), was highly critical of the group.
But the biggest lesson of all might be for the buy-side. Maybe it’s time to stop rehearsing the old war stories about Ocado and Sports Direct and take on board the fact that both groups, albeit a bit belatedly, are beginning to live up to the expectations their advisers had of them when they joined the public markets.
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