The Medibank wave of jubilation has swept all before it.
A win for a government desperately craving domestic kudos, a well orchestrated campaign for investment banks short of work and retail investors jumping for joy from the easy pickings of a privatisation.
But in the cold light of day, once the champagne goes flat, Medibank Private will struggle in the months to come to maintain the momentum of its overhyped float.
It has been sold at what can only be described as a heroic price. And, as the biggest player in the health insurance business, the primary way for it to lift earnings to justify its listing price is to slash costs.
Given that chief executive George Savvides has been running the company for more than a decade, it would be fair to assume he and his management team already have attacked the easy cost areas.
In fact, a little reported fact is that Savvides did such a splendid job on the cost front that Medibank Private paid out around $1.1 billion in dividends in the four years to 2013, with the Gillard Government taking a $400 million payout shortly before the last election.
At $5.7 billion, Medibank Private is one of the biggest Initial Public Offerings in Australian history. Telstra was bigger but was done in three slices.
As a household name, and a hugely profitable business, the privatisation ticked all the boxes for a stampede from retail investors.
The investment banks leading the sales process capitalised on this magnificently. Most retail punters applied for vastly more stock than they needed or wanted, knowing full well that everyone else was doing the same, and that everyone would be scaled back.
In the end, small shareholders were allocated around 60 per cent of the company. The rest was divvied up between local investment houses and offshore investors.
And that’s the neat trick to ensure demand is maintained in the short term.
Many big institutional investors run funds that must hold a certain percentage of the country’s biggest stocks. Most of them are short right now. They’ll have to buy in. And that means the small investors who forked out $2 a share are guaranteed windfall gains if they sell straightaway.
For the past two years, with interest rates at record lows, investors desperately seeking income have turned to big dividend paying stocks.
That’s helped push the stock market higher and encouraged many big companies to pay out a greater proportion of their earnings to attract investors.
It is a point the Medibank Private promoters exploited to the hilt.
The dividend, according to the float documentation, is an attractive 4.2 per cent. That’s true if you annualise the June 30 declared payout. But given almost half this year is gone, the real return on your $2 investment is 2.5 per cent, which won’t be paid until next September – almost a year away.
On top of that, the fine print in the float documents suggests that Medibank Private could struggle to maintain this year’s dividend into the future.
The company will hand out 70 to 80 per cent of its underlying earnings next year and 70 to 75 per cent the year after – significantly lower than this year. That means the company will need to boost earnings significantly if it wants to maintain the dividend.
Privatisations are always a gamble, a delicate balancing act for a government.
Sell too cheaply and taxpayers miss out. But if the hype is overdone and new shareholders find their investment under water it kills demand for floats further down the track and, in extreme cases, can inflict electoral damage on a government.
Medibank Private certainly isn’t cheap. Some would argue that at $2 or higher, it is not even good value. But it has been designed to deliver capital return, at least in the short term. The real test will be six months from now.