If you see Sid, tell him it was worth it

Written by Pete Davison.

Twenty five years after the ’Tell Sid’ campaign, early birds who invested in British Gas did pretty well out of the deal, says a Marlborough investments expert.

Myles Palmer, of Brewin Dolphin, has been crunching the figures to see how shareholders have benefitted from the sale of state-owned industries.

The research is particularly relevant, says Myles, because with the fragile state of the Government’s coffers today, further sell offs look likely, with possible candidates including the Tote and the Royal Mail.

In 1984, the privatisation of BT, a state owned business, paved the way for privatisations around the globe. More than two million people participated; keen to buy the shares at the discounted price of 130p.

The success of BT created a wave of sell offs that presented opportunities for investors.

“An analysis of the of the most well known privatisations since flotation shows that the privatisation portfolio outperformed the benchmark FTSE 100- in some cases doubling it- for most of the same period,” says Myles.

“In the majority of cases returns are impressive with significant out-performances. Investments in six of the nine privatisations out-performed the FTSE 100, which delivered an average yield of only 3.3 percent.

“The most profitable privatisation is British Gas, which was memorably sold to ´Sid´ in 1986. Strong management has assisted in transforming British Gas into a global integrated oil and gas company and investors have reaped the rewards.

“Many of the privatised UK electricity, gas and water companies also performed well and have since been taken over by larger European utilities. Investments in Severn Trent, Powergen and National Power would all have outperformed the market.”

Ironically, says Myles, the worst faring utility was the first to go. Shares in BT are now worth 190p, although original investors would have benefited from the spin-off of O2 in November 2001 - increasing their share price by £2 per share back then.

Investors would have underperformed the market had they participated in the British Airways float in 1987, however.

“Poor relative performance would have been made worse by the below market dividend yield,” says Myles.

“The stiff competition from low budget airlines entering the market, the historically high cost base left over from their state ownership days, high staff costs and threats of strike action have also all contributed to the underperformance of BA.”

Looking forward, the weakness of the public finances could prompt another spell of privatisations.

In 2008, the Adam Smith Institute, in its report Privatization – Reviving the Momentum, estimated that the government could raise as much as £20bn from privatisation, with candidates including Royal Mail, Channel 4, BBC Worldwide, Scottish Water, Northern Ireland Water, and the National Air Traffic Control System.

The opportunities to buy shares at a discount, the scope for rapid growth following floatation and the chance of premium takeover bids from larger firms down the line, all contribute to expectation of profits, says Myles.

For more information about investments, and the other financial services offered by Brewin Dolphin, log on to www.brewin.co.uk

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