Time for greater transparency in IPOs

Mighty River Power’s initial public offering “book-build” should have been conducted on market.

That’s my conclusion having kept an ear to the ground these past couple of days during the price-setting phase of partial float.

It’s probably not a popular angle among investment bankers but I’m sure it resonates with many retail investors feeling uneasy about the amount of vendor influence on the IPO process, in this case a New Zealand government with so much at stake.

As Mighty River Power chairwoman Joan Withers was extremely quick to point out last night – determination of the $2.50 per share final price was at the “sole discretion of the Crown as outlined in the offer document”.

The government had the right to choose the make-up of the company’s shareholder register, which is not something your average vendor is privileged of.

It was interesting this week matching the bullish commentary out of Australia with the hushed tones from brokers and fund managers on this side of the Tasman.

As NBR ONLINE reported on Tuesday, the feeling here was quite different to what was being reported in Australia. Over there it was middle to top of the $2.35-2.80 indicative range; over here it was bottom of the range with some going for unders.

And as for the $2.60 “early indication” that the AFR’s Street Talk column talked up yesterday morning, where did that come from? Did they not get the Greens/Labour press release?

The point is that every ten cents makes a big difference if you are a local financial institution submitting your bid into the book-build while knowing the seller has the final say in how the allocations are spread.

More transparency

Given all that I reckon it would be good if the book build process for IPOs like Mighty River could be made live and visible to all market participants.

That way at least there would be more informed bidding and guys like me could keep a lid on the spin from one side or the other.

It might result in a more orderly allocation process with allocations being set by a prescribed set of rules, say.

Last year the ASX released a consultation paper on the subject, suggesting that such an idea could bring more efficiency, fairness and transparency to the primary equity market.

The proposal went far in that it basically invited retail investors via their brokers in on the book building game.

Of course it was quickly shot down by some of the larger investment banks, which rejected the move, arguing it would shut them out and leave the process open to exploitation by hedge funds, short sellers and high-frequency traders.

Hence we haven’t heard much more about it.

Worth revisiting

NZX boss Tim Bennett was open enough to the idea when NBR canvassed it with him late last year.

“Anything that provides more clarity for the book-build and appropriate pricing for the market I think is a good thing,” he told NBR PRINT in November.

“Whether or not the ASX solution is right for us I'm not sure, but we will certainly look at that with interest."

However, it became more difficult with public issues the size of Mighty River, Mr Bennett reasoned.

"When you are trying to raise hundreds of millions of dollars you really do need, I think anyway, a traditional process, where you get commitments from institutions.”

The problem is that the traditional process is still hidden from public scrutiny.

And when government’s are selling assets, albeit half shares, there is an extra need for transparency.

That’s my ten cents anyway, having subscribed for a certain dollar amount of Mighty River shares on the expectation that I’d be scaled back, at least to some extent – something that’s not going to happen now.