The directors of the former First National Building Society, now the limited company First Active, are determined to proceed with their plan to float the operation on stock markets in Dublin and London on October 6th.
But the plan was hatched in far happier times for stock markets and share prices. Stock markets have fallen sharply and conditions remain volatile so the shares will come to the market at a much lower price that would have been possible in headier times.
A share price between 265p and 380p has been forecast, valuing the company at between £387 million and £510 million and giving each qualifying member "free" shares worth £1,170 to £1,700. This is well below expected values earlier this year of £1,800 to £2,400.
The Dublin ISEQ Index is now down 20 per cent since details of the flotation were announced in March, financial shares have been hard hit - Bank of Ireland is down 23 per cent, AIB down 5 per cent and Irish Permanent down 25 per cent - and the outlook is uncertain, but First Active is determined to float next month. Managing director Mr John Smyth has argued that share prices are still well above the levels of a year ago when the plan to float was first announced. Despite recent falls, the ISEQ Index is still up 12 per cent on September 1997. Bank of Ireland is up 37 per cent, AIB up 55 per cent and Irish Permanent up 23 per cent.
But is flotation now the best strategy for the members who own the former mutual building society or should it be postponed until shares prices are stronger? Specialist recruitment company Parc has already postponed its planned flotation and there is speculation that Goldman Sachs will wait until conditions are more favourable.
The key to whether First Active should go ahead or postpone lies in how equity markets will perform over the next 12 months. And that is the problem. Nobody knows where the markets are going. Share prices could recover or they could fall further.
On October 6th, First Active will come to the market at a price dictated by market conditions at that time. Members are getting free shares - about 80 per cent of the shares to be issued will go to members in the form of free shares. So they will get the benefit from any increase in the share price in a rising market as long as they hold their shares.
But the immediate windfalls for members from the value of free shares on flotation will be much less than had been anticipated earlier. If the share price falls after flotation - something those setting the flotation price will be keen to avoid - the value of the shares given to members will fall. If share prices recover in nine to 12 months, the members who will lose out will be those who sell their shares at or near the flotation price.
In addition to free shares, members have been given the opportunity to buy additional shares. They can apply to buy up to £5,000 worth of shares on each qualifying account. Whether members should apply to buy shares again depends on how they think the share price will move after flotation and the length of time they are prepared to leave their money invested in the shares. If they are prepared to hold them for over a year the shares could be a good investment - financial stocks have traditionally been a good long-term investment. If they only want to hold the shares for a short period in anticipation of a quick gain they may be disappointed. Borrowing to buy the shares is generally not a good idea. The share price could fall but the full amount borrowed will have to be repaid regardless of the fact that the value of the shares could be less than the amount borrowed. But if the float goes ahead in current market conditions all of the existing members will lose out because of the allocation of shares to institutional investors. Institutions will now be able to take a stake in First Active at a much lower share price than would have been possible some months ago. So it could be argued that by coming to the market now the former building society is selling shares too cheaply to the institutions. Another way of looking at it is that First Active will now have to issue much more shares than it had planned to institutional investors to raise the same amount of cash.
About 48 million shares or about 20 per cent of the equity is being allocated to institutional investors who will also be able to buy any of the free shares members opt to sell at the time of flotation.
The board is using the flotation to raise £104 million of new equity and, as a publicly quoted company, to have the option to go to the market for funds at any time in the future, for example to complete an acquisition. But it has insisted that it is not now in immediate need of funds, so postponing the flotation would not be a problem.
The problem of postponing lies in the preparation and documentation involved. If First Active abandons its October deadline it would be unlikely to come to the market for another eight to 12 months. November and December would not be favourable months for a flotation with a large retail element. Moving into 1999 would require the preparation of new documentation because the company would have moved into a new financial year.
This would not be a major problem and the new timing could coincide with a recovery in the markets, though there is no guarantee of recovery. But on balance the First Active board has decided that even though market conditions are far from ideal, it is better to go ahead with the October flotation.
