Regulators are coming under pressure to improve pre-flotation disclosure of information to investors, following this week’s controversial listing of AO World, when shares in the online retailer jumped 33% on its first day of trading

Last updated: February 28, 2014 10:05 pm

Regulators under pressure over AO listing

By Andrew Bolger, Andrea Felsted and David Oakley

Regulators are coming under pressure to improve pre-flotation disclosure of information to investors, following this week’s controversial listing of AO World, when shares in the online retailer jumped 33 per cent on its first day of trading.

AO’s pathfinder’s prospectus was circulated to potential investors on Thursday last week. The shares were priced on the following Tuesday and floated on Wednesday – giving institutions only four working days to consider the document.

The timetable was shortened because the shares had been pre-marketed and it had became clear that demand from investors would be high, said people familiar with the process.

But fund managers – through their trade body, the Association of British Insurers – have been urging the Financial Conduct Authority to push for the earlier publication of prospectuses, even though the rules are set at European level.

The ABI argues that publishing the prospectus earlier in the IPO process would enable investors to be better prepared and give more incisive feedback on the company and its valuation ahead of setting a price range.

“The AO prospectus did come late, which does worry you as it makes you think the company wants to get away with as little scrutiny as possible,” said the head of European equities at a UK fund management group on Friday.

Chris White, head of UK equities at Premier Asset Management likened the marketing process to last year’s Royal Mail float. “A lot of the shares went to a favoured list of investors who had been pre-marketed to, which left a lot of investors unhappy – including us,” he said.

AO also refused to disclose to how much of its annual profit comes from selling product protection plans on appliances, on behalf of insurer D&G.

Its prospectus showed accrued income on AO’s balance sheet of £17.9m, primarily from the commissions it expected to earn on the plans, but the company would not say how much of this was recognised in its profits each year. People close to the group said investors who had bought shares were “comfortable” with the situation.

However, concerns over the AO flotation do not appear to have slowed the IPO bandwagon – with Poundland, the discount retailer, and Pets at Home, the seller of everything from rabbits to cat collars, both announcing their prospective valuations on Friday.

Poundland expects to be valued at up to £750m, while Pets at Home’s indicative price range gave it a market capitalisation of up to £1.3bn. Pets at Home will also come to the market with £275m of debt, giving it an enterprise value of up to £1.58bn.

Both companies have indicated price ranges close to those expected when it first emerged that they were considering a listing. The expected valuation of AO escalated in the months ahead of the float.

A lot of the shares went to a favoured list of investors who had been pre-marketed to, which left a lot of investors unhappy – including us

– Chris White, Premier Asset Mgt

ETX Capital, a financial spread betting firm, said it expected Poundland and Pets at Home to close significantly higher on their first day of trading. Bankers said the book on Poundland was already covered at a “good price”. There was also enough demand for all of the Pets shares, said people familiar with the situation.

But one institutional investor said he was surprised at the sorts of valuations being mooted. “I’m pretty amazed that people are paying these sorts of prices,” he said. “It probably makes me a bit more cautious about everything coming.”

Tomas Freyman, director of valuations at BDO, the advisory group, said flotations such as AO appeared to have thrown standard valuation models out the window. “Every company I speak to now is thinking of an IPO,” he said.

“Valuations are becoming more stretched and we are seeing a few more ‘blue sky’ companies trying to raise money, encouraged by the current buoyant market conditions,” said Premier’s Mr White.

 

February 28, 2014 7:52 pm

Stubborn grey areas in AO.com flotation

By Matthew Vincent

Pitfalls of ‘never-mind-the-details-look-at-the price’ mentality

Anyone who has had to unblock the waste pipe on a cheap washing machine will have learnt – the hard way – that there are some things you should never buy without doing proper research. A heavily discounted, and reconditioned, washer dryer can seem a lot less of a bargain when transplanted from the showroom to a puddle on the kitchen floor.

I was reminded of this salutary lesson not just by recent personal experience but by news that AO.com – the online appliance retailer that floated in London this week – also has a sideline in selling old stock at “special prices” via ElekDirect, a firm owned by the father-in-law of AO founder John Roberts. Not because the integrity of ElekDirect or its cold water hoses are in question, but because the sales tactics of other discount fridge magnates bear a striking resemblance to the initial public offering of shares in AO.

Sellers of cheap appliances will impress upon eager buyers that stock is strictly limited, everything must go, and they should buy now while stocks last – rather than deliberating over guarantees or warranties.

And this “never-mind-the-details-look-at-the price” mentality appears to have played a part in the lather surrounding AO’s stock market debut.

Investors – and there were about 300 institutions queueing round the block to buy – were not given a chance to view AO’s pathfinder prospectus until three days before the shares were priced, and four days before they began trading.

Stock was kept in very limited supply. AO’s owners offered only 30 per cent of the company’s shares in the IPO – not much more than the minimum 25 per cent free-float permitted under the London listing rules.

As a result, for many of the would-be buyers, stocks did not last. About 100 institutional investors missed out on buying altogether, as 85 per cent of the new issue was awarded to just 15 investors.

Perhaps not surprisingly, given this ‘pressure sell’, AO’s shares rose 33 per cent on their first day of trading – giving the company a market capitalisation of £1.7bn, more than 150 times its underlying earnings last year.

Clever salesmanship? In many ways. But fund managers are already beginning to express concerns over the transparency of the process, and the disclosure of information. They might also question the role of the advisers on the sale – one of whom, Rothschild, took home £12m in fees for advising the board on a fundraising that had gross proceeds of £60m.

Anyone whose whites have been blighted by a faulty outlet valve will be familiar with the unpleasantness of a “dirty float”. In the City, the phrase has another meaning altogether. If investors lose confidence in the IPO process, it can block the pipeline of equity fundraisings to the detriment of others. Regulators need to ensure that London does not gain a reputation for washing its dirty laundry in public.