After weeks of pre-registration, during which more than 750,000 people have asked for a prospectus, the Federal Government finally released the document that outlines the deal.
For somewhere between $1.55 to $2 – although it could be below, but not above, that price range for retail investors – you can own a share of Medibank Private.
The Government is hoping to raise around $5.5 billion from the deal, or at least $4.3 billion if demand turns out to be lukewarm.
Time will tell whether that is a good return to taxpayers, and much will depend on what new infrastructure the Government puts the money raised towards.
However, the key question for those pondering a purchase is whether the company offers value for money relative to the universe of alternative investments available.
On this question there seems to be an unusually high degree of unanimity amongst the three fund managers the ABC has interviewed.
Montgomery: ‘Incredibly stable’ investment
Roger Montgomery is one of the nation’s best known ‘value investors’, who tries to pick good companies that are undervalued to populate his portfolio.
Mr Montgomery has labelled Medibank a good company, due to its dominant position in a stable, heavily regulated industry which the Federal Government wants to remain profitable because private health insurance takes pressure off public health expenditure.
Medibank is the largest fund in Australia, with a 30 per cent market share, which Mr Montgomery has said is a large advantage.
“It all comes down to price: less is more when it comes to price; so the lower down the spectrum of the [indicative price] range, the more money investors will make after it lists,” he told Midday.
“I think it’ll be incredibly stable. It’s in the Government’s interest to maintain profitability of this sector simply because it’ll all be borne by the Government if this sector isn’t profitable.”
Mr Montgomery observed that it is also in the Government’s interest not to rip-off voters in IPOs.
With Telstra’s ‘T2’ float as a very notable exception, Mr Montgomery says other privatisation floats have generally been a good deal for those who bought in.
Johnson: ‘Not cheap enough’
Fellow fund manager Steve Johnson, the chief investment officer for Forager Funds, agrees that government sell-offs are generally a good deal for retail investors.
“The Government’s not interested in upsetting the taxpayer and probably the biggest factor is there’s always a lot of inefficiencies in a government-owned business that can come out over the years after the float,” he told The Business.
“So we’ve seen people do wonderfully well out of businesses like CBA, the first Telstra float, even more recently QR National [now called Aurizon].”
However, Mr Johnson said he will not be investing in the Medibank sale for two reasons.
The first comes down to price, depending on whether the shares turn out to be priced close to $2 or closer to $1.55.
“It’s a surprisingly big range for mine and I’d say at the bottom end I think it’s quite fairly priced, and at the upper end it’s getting fairly expensive,” he said.
Investors will not know what the final price is until the big institutions buy their stakes after the retail offer has closed.
The only guarantee the Government has made is that retail investors will not pay more than $2 (on up to $250,000 worth of shares), even if strong institutional demand pushes the final float price above that.
Mr Johnson’s second cause for hesitancy is the competitive pressure that is only in its early stages in the Australian health insurance sector.
He told The Business that Medibank should be able to improve its cost efficiency, and thus profit margins, closer to that of private rivals but the industry as a whole is likely to become less profitable.
“I think there should be more competition in the market and you’re seeing the comparison websites get more and more market power out there, and the more people can easily compare one product to the other, generally the lower margins across the industry are going to be,” he said.
Esho: ‘Attractive’ at $1.55, ‘not terrible’ at $2
The managing partner of investment firm 100 Doors, Peter Esho, agrees with Steve Johnson that the share price range is very wide, meaning how good a deal investors get will depend whether final pricing is near the top or bottom of the range.
“We’ll only be bidding with a long-term horizon, we won’t be chasing any short-term profits, and we hope that we’re filled at an attractive price, which is at the lower end of that indicative range,” he told ABC News Online.
However, Mr Esho differs from Mr Johnson on the $2 top end of the range.
“It’s not a terrible deal for the investor that has a very well diversified portfolio, is looking at it as a long-term investment and is not necessarily chasing a quick buck once it hits the market,” he said.
“Good quality businesses do come at a price, and if it is priced at the top of the range it’ll be because demand is so strong and that should flow through into the secondary market.”
The consensus of the three fund managers seems to be that Medibank Private is not unreasonably priced over the long run, but it is not a bargain either, and investors wanting to turn a quick profit should probably look elsewhere.