Testing the water for floating

THIS week will be a nail-biting one for everybody in the initial public offerings world. But for none more so than Intertek, which tests and inspects everything from toys to fridges. It plans to raise £250m in a flotation that prices on Friday.

Normally, this would be a good issue. Intertek has all the disadvantages of debt (huge interest payments) but few of the advantages (it still pays a massive tax bill). Indeed, last year's tax rate was an astonishing 261%. In theory, refinancing the company with public equity ought to be good for it and for the new shareholders.

What is more, Intertek is a solid business with reasonably strong growth prospects as Western firms outsource manufacturing to low-cost Asian countries. The group could grow sales 10% annually for a few years.

True, there are concerns. Can Intertek's high margins be sustained once it no longer has the twin disciplines of debt and a hard-driving private-equity house as a parent? And how vulnerable is its customs unit - which runs inspection for developing countries - to the fickleness of few customers such as Nigeria?

That said, the risks seem to be priced in. At the bottom of the indicative range, Intertek would have a market value of about £600m. Adding on net debt gives an enterprise value of £830m - or 10.7 times next year's underlying operating profit.

The 20% discount to European support and professional services firms would normally be quite sufficient to tempt investors. But in the current jittery climate, don't be surprised if shareholders demand more.

Closing the window

IT is open season on flotations. At least, that is the story being put about by some investment bankers. Their beef is the lack of support investors gave recent offerings from the likes of HMV and Punch Taverns. The first was a flop, falling to a discount in the aftermarket. The latter folded entirely.

These duds weren't the fault of the banks, of course. The allegation is that fund managers engaged in a sinister conspiracy to buy good companies on the cheap. Apparently, they pushed negative news into the market on the eve of offerings, using this as an excuse to chisel at the price. There is even talk of a ring of big funds ganging up to take pot shots at IPOs.

What tosh. Equity fund managers are certainly cautious beasts. Their own businesses are under pressure, thanks to weak stock markets and switching by pension funds into bonds, and they are skittish about IPOs, having been burned often in the past three years. What is true is that they are more demanding on value. They are seeking deep price discounts to ensure that new issues perform.

The first wave of IPOs showed that investment bankers had not fully taken this on board. Perhaps this was understandable, given it had been 14 months since the last big issue. Fierce competition for deals between idle equity capital markets units may have led bankers to make unwise promises on value to vendors. Whatever the reason, HMV and Punch were overpriced.

Such flops have queered the pitch for the next wave. Much depends on whether vendors are now prepared to reduce sufficiently their price expectations. Another big flop would cause the IPO window to close.

Discounted and underwritten

REMEMBER the hoo-ha a few years ago about how the City was ripping companies off by overcharging for underwriting share issues? And how one mooted solution was that companies could opt for deep-discounted rights issues?

With new shares sold at a big discount, there wouldn't be a need to pay underwriting fees at all, would there? Well, you know what's happened? Deep-discounted issues have, indeed, taken off. All the big issues of the year - Kingfisher, Imperial Tobacco, ICI, easyJet and Enterprise Inns - are deeply discounted. But they are all also underwritten.

The companies have been told by silver-tongued advisers that they need committed funds to complete deals or shore up balance sheets. The idea of getting share issues away without a fee seems to have vanished in a puff of smoke.

Hugo Dixon is Editor of www.breakingviews.com