Initial Public Offerings are not the flavour of the month right now, with the appetite of investors waning after some enthusiasm earlier in the year.
Many ordinary punters will have been put off by the Royal Mail (LSE: RMG) IPO in October 2013, failing to snag a reasonable number of shares while the big boys in the City hoovered them up. Initial indications were that the firm was sold off too cheaply, with the share price quickly rising from the offering price of 330p — today it stands 50% higher at 498p.
Then there’s the upcoming flotation of TSB, sold off by Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US). A successful takeup is needed for many reasons, including political ones. And the indicated price range of 220-290p might be too low again — the middle of that range would value the whole of TSB at £1.28bn, which is below its book value of £1.6bn.
The fourth emergency service
But what about the AA breakdown recovery service? Currently owned by Acromas, its IPO was announced on 6 June. The shares will be priced at 250p and the majority, once again frustrating private investors, will be placed with City institutions. The flotation price values AA at £1.4bn.
And one of our top investors, Neil Woodford, appears set to take a slice. According to Sky News, his Woodford Investment Management firm is to invest in a substantial portion — although Mr Woodford is yet to confirm the plan himself.
He would join his former employer Invesco in backing the deal, with Aviva Investors and JP Morgan also getting their fingers in the pie. But what does that say about the value of AA?
Long term
Mr Woodford is known for his long-term approach, and he’s made some canny deals in the past.
He steered clear of the banks and avoided the sector crash when the credit crunch hit, but after the recovery he put some money into HSBC Holdings, one of the two FTSE banks (along with Standard Chartered) which avoided the worst by doing most of their business in Asia. There are fears that a Chinese slowdown could hurt, but HSBC’s liquidity is strong.
Mr Woodford also invested in Legal & General (LSE: LGEN) a year ago, as the insurance sector started on a strong rebound. Legal and General has done well since then, gaining 35% over the past 12 months — and there’s still a dividend yield of around 4.5% expected, with EPS gains forecast for the next couple of years.
Get some AA?
The AA reported sales of £244m in its third quarter last year with earnings up 8.2% to £104m, although it does carry debt to the tune of £3bn. It’s a tough call, but Neil Woodford’s backing says a lot about the long-term prospects, and it might be worth getting a few shares — if you can.