Article worth thinking about below.
In short, if Masons strategy worked, for early price discovery, then it possibly means that listing price on the day will be as good as it gets for a while.
If so, any thoughts on exit strategy ?
Article follows:
Mason to get Medibank herogram Illustration: David Rowe TONY BOYD When the post mortem is done on the $5.5 billion Medibank Private initial public offering one of the heroes will be a thoughtful public servant who is hardly known outside of Canberra. Jan Mason, who heads the asset sales team in the Department of Finance, pioneered a book-build process that quickly elicited price discovery without the usual IPO game playing. The decision to give preferential treatment to fund managers who bid strongly in the first 24 hours without the benefit of feedback is the reason that federal government was able to revise upwards its indicative price range from $1.55 to $2 to a new range of $2 to $2.30. The joint lead managers, Deutsche Bank, Goldman Sachs and Macquarie Capital, told the market on Wednesday that 300 investors split half and half domestic and foreign had covered the book multiple times “with high quality demand”. The message to fund managers was that anyone who bids in the final two days of the institutional book-build will have to pay $2.10 or more. For retail investors that means that Medibank stock will probably trade on the market next Tuesday at between $2.15 and $2.25 a share. Also, it is likely those who went for stock through brokers will be scaled back. The Medibank book-build is in stark contrast to the QR National float in 2010. On that occasion local fund managers, conscious that retail had turned up their nose at the stock, stood back and waiting for the government to reprice it downwards. However, offshore investors jumped at the chance to buy a business that was bloated with costs, rife with inefficient labour practices and in need of quality management. The offshore buyers made a killing over the next three years. Medibank does not have the same excess fat as QR national but there are still plenty of opportunities for chief executive George Savvides to meet the obviously high expectations of Medibank’s retail and institutional investors. Some think Savvides will rue the day Mason and her team, on advice from Lazard, created an offer structure that has resulted in Medibank having a price earnings multiple of at least 22 times forward earnings. But a comparison between the nearest listed competitor, NIB Holdings, and Medibank reveals many opportunities for Savvides to earn his $4 million a year pay packet. Medibank’s underwriting margins are much lower than NIB which trades at 20 times earnings. NIB has margins of 5 to 5.5 per cent while Medibank is at 4.7 per cent and tipping they will rise to 4.9 per cent this year. The health insurance industry is well known for hollow logs which are called outstanding claims liabilities. Medibank has been more conservative than NIB. In other words it has more “buffer” that can be used to smooth future profits. The risk margin at Medibank rose in 2014 to 7.7 per cent while it went down at NIB from 6 per cent to 4.6 per cent. Other metrics that show Medibank has scope for improvement are: Medibank has capital to premium revenue of about 17 per cent compared to 13.5 per cent for NIB and Medibank has no debt compared to 16 per cent debt to equity for NIB. NIB’s target is 30 per cent debt to equity. One area where Medibank has outspent NIB is capital investment. In the past two years Medibank has spent $170 million on IT software and property plant and equipment while NIB has spent $20 million. The big investment in IT is a risky because it will involve change to customer facing applications. That will have to be watched closely by Savvides.
