Comment: Flotations give firms pause for thought

Mergers and acquisitions are back in fashion and the number of companies looking to float is at its highest since 2007. Consider the blue chip companies recently going to market or looking to do so: DFS, House of Fraser, Just Eat, Poundland, Saga, TSB. Yet suddenly there is a sense the equity markets are ahead of themselves with eye-watering valuations and cold water needs thrown on excitable traders in danger of creating another monster.

So is the market heading for a fall? There is only so much money that any market can raise and the number of flotations, or initial public offerings (IPOs), will likely exhaust cash supply.

It seems there is little sign of that and other cash-rich sources will step forward to provide the necessary backing. For instance, the sovereign wealth funds in the Middle East and Asia have mountains of cash they may want to plunder at some point, particularly targeting recoveries (banks?), energy and mineral firms.

Despite a recent downturn, evidence suggests they will continue rising for the foreseeable future with a few bumps along the way, largely because the factors favouring an upward swing outweigh those pointing in the other direction.

The improving economies in Britain and the US, and a more stable Europe, are underpinning confidence in general and investor sentiment in particular. The rise in equity markets has also been self-fulfilling as investors unable to get decent returns elsewhere are attracted to stock markets, pushing those even higher.

Aside from that, the £49 billion sale of Vodafone’s stake in Verizon has lined the pockets of City institutions and most of that money will be reinvested in the markets. Private equity funds which have been sitting tight during the lean years for valuations are now unloading their portfolio companies on to the markets. Merlin Entertainments, owner of Madame Tussauds and backed by Blackstone and CVC Capital Partners, made an encouraging debut, as have Pets at Home, backed by KKR.

We can expect a number of private equity-backed Scottish companies to follow suit. Housebuilders Miller Group, also backed by Blackstone, and Cala Homes, owned by Patron Capital, are known to have flotation in their sights following a recent flurry of firms in the sector coming to market. On normal times for private equity firms to offload their holdings Cala may be a year or two away, though the vital factor in any decision to float will be when the owner thinks the right valuation will be available, and few want to miss the boat.

Tomorrow in The Scotsman I will reveal the next Scottish company with a flotation in mind and said to be valued at anything between £40 million and £150m. It’s an exciting business attracting a lot of interest.

But there are caveats. The bears say markets have peaked and billionaire hedge fund manager George Soros, who got the credit crunch right, has bet on a fall. We report on page 42 that the independence issue may hit the value of the next Scottish flotation – lab testing firm Exova.

As they say in the City, the value of shares can go down as well as up.

Tin hats at the ready for under-fire insurers

THE insurance industry has never witnessed a month like this. First the annuity market was thrown into disarray by the Treasury’s revolutionary rule changes. Then came the cap on pension management fees. On Friday a leaked report of a regulatory investigation into the selling of a range of products since the 1970s wiped billions off the value of insurance companies.

On top of all this, questions are being asked of the new Financial Conduct Authority’s error in allowing the leak which created a disorderly market. None of this helps restore faith in a sector that is badly in need of some restorative medicine.

If the industry was in party mood after being excused the problems that beset the banks then it will be suffering a collective hangover this morning. Insurers and pensions providers in particular had an easy time of it when workers were happy to leave their future well-being to those they assumed knew best.

A series of mis-selling scandals exposed the industry as self-serving while enriching itself on the back of public ignorance.

Ros Altmann, a former pensions adviser to Downing Street, and a campaigner for better service in the sector, says that traditionally, financial products have been “sold” not “bought”, often through commission-driven sales staff who were handsomely rewarded while the customer was forgotten. Her analysis of the current state of affairs reveals the weaknesses in attempts to clean up the system. She claims the much-heralded retail distribution review has not ended commission selling as intended as the industry pays commission to others who can sell their products without any advice or quality checks.

These are worrying claims from someone who welcomed recent changes for bringing about the reforms she demanded. Altmann will be making another statement this week. Tin hats all round for the insurance industry.

Twitter: @TerryMurden1