House of Commons - Public Accounts

Select Committee on Public Accounts Sixtieth Report

THE SALE OF AEA TECHNOLOGY

PROCEEDS

Share Price

6. The Department sold all their shares in AEA Technology for 280p each on 25 September raising £224 million. On the day after the sale, shares traded on the London Stock Exchange at 323.5p, a premium of 43.5p (16 per cent) compared with the Department's anticipated premium of 20p (7 per cent). Since the sale the share price has increased substantially, outperforming by a significant margin the FT Support Services Index (Figure 1).[4] At 29 May, the shares stood at 777.5p, 34 per cent higher than they would have been if they had performed in line with the FT

Support Services Index.[5]

Figure 1: AEA Technology's share price compared with the FT Support Services Index

Source: Published stock market prices

7. The Department told us that the sale was a success and that fair value was obtained for the business as it stood.[6] They suggested that the increase in share value since the sale was attributable to two unforeseeable factors, a general increase in share prices in the support services sector and the impact of eight acquisitions made since the sale, the first being BR Research, purchased in December 1996 and the last being Nycomed Amersham Industrial Division in February 1998 (Figure 2) with most of the growth attributable to the acquisitions.[7]

Figure 2: Acquisitions/Joint Ventures by AEA Technology

8. The Department told us that the acquisitions changed the character of the company very substantially. For example, the company now have a substantial software business in North America. The Department told us that none of the increase in share value arising from these acquisitions was predictable. It would have been possible for the acquisitions to be unsuccessful.[8]

9. We therefore asked why, if most of the growth in share price was on account of the acquisitions, AEA Technology's share price had substantially outperformed the FT Support Services Index in the three months after the sale but before the acquisitions were made. For example, by 28 November 1996, before the first acquisition in December 1996, AEA Technology's share price had already risen to 386.5p, 30 per cent higher than if it had increased in line with the FT Support Services Index.[9] The Department told us that, although they had no responsibility for the company after the sale, they believed that in the months following the sale the management was assiduous in talking to their shareholders and explaining to them their plans as they gradually began to develop.[10]

Phasing the sale

10. We have urged on a number of occasions that, especially where shares are difficult to value, departments should consider selling them in phases. For example, retaining 40 per cent of shares in National Power and PowerGen for sale led to increased proceeds of £2,300 million.[11] In response to our predecessors' report on the sale of National Power and PowerGen[12] the Department agreed that consideration should always be given to the possible benefits arising from a phased sale.[13]

11. In the case of AEA Technology, the Department sold 100 per cent of their shares even though the shares were difficult to value. They did not investigate the case for phasing and, in particular, whether phasing might generate additional proceeds. Given the increase in the price of shares since the sale and, assuming that a decision to retain the shares in Government hands to sell later would have had no material impact on the development of the company or the attitude of their institutional investors, a retained holding of 40 per cent of shares at 29 May 1998 would have been worth some £250 million[14] compared with £90 million at the 1996 sale price.

12. The Department told us that they did not consider phasing the sale because it was the policy of the Government that AEA Technology should be sold in one go.[15] When the Atomic Energy Authority Bill was being debated in 1995[16] Ministers rejected an amendment proposing that not more than 50 per cent of AEA Technology should be sold.[17]

13. We asked why the Department regarded this long term ownership policy as inconsistent with retaining a minority shareholding with the stated purpose of selling the holding later to obtain best possible proceeds. The Department told us that Ministers had said in debate that full commercial freedom was not consistent with a degree of public ownership. The Department considered that phasing was not consistent with this policy.[18]

14. The Department told us that they understood phasing to require a substantial proportion of shares to be held for some time. If they had kept back a proportion of shares they would have had to explain in the prospectus what the policy was for disposal or holding of the shares. With the imminence of a General Election the Department considered this would have been difficult and might have made a sale impossible.[19]

15. We asked the Treasury what advice they had given to the Department on phasing. The Treasury told us that they saw their role as bringing to bear their experience and giving general advice. They do not seek to double-guess departments and any decision is a matter for departments. In this case the Treasury accepted that it was a policy decision to sell the company.[20]

16. The Accounting Officer told us that he did not seek a Direction from Ministers because the Department saw no value for money implications in the decision to sell 100 per cent of the shares. The Department had not thought that a phased sale would be successful because they regarded the sale prospects for a company with a limited track record, heavily dependent on government work, as fragile. The sale also followed the sale of British Energy which the market had not regarded as a great success. In the view of the Department, a retained holding would have complicated the sale. They believed that it would also have been difficult to write a convincing prospectus saying what would be done with the retained shares given the imminence of a General Election.[21]

17. The Department did not raise the question of phasing with Ministers as they believed it would be academic to do so. They told us, however, that it would have been better if the Department had written a paper setting out the case against phasing.[22]

Setting the share price

18. The Department set the price for shares following a process of obtaining bids from the market (known as bookbuilding). The purpose of bookbuilding is to establish how many shares institutions would purchase at a range of prices. When bookbuilding is applied rigorously the price at which demand falls off is clearly identifiable and the vendor can then judge the price which strikes a balance between obtaining the best possible proceeds and giving investors a reasonable premium in the aftermarket. There is no standard price range over which institutions are asked to bid. Ranges are determined by a number of factors including the particular circumstances of the business for sale.[23]

19. The price range chosen for AEA Technology, 30p, (240p-270p, later revised to 250p to 280p) was, however, narrower than the average of ranges used in flotations from December 1995 to September 1996. The top of the range was initially set at 270p on the advice of Schroders and Cazenove who considered that the objective should be to achieve a final price at the top of the range to indicate to the market that there was strong demand for the shares at that level. They thought that pushing the price range higher than 270p would run the risk of falling short of that objective. In view of the demand indicated during bookbuilding, however, the indicative price range was raised to 250p-280p the day before the close of the offer.[24]

20. Demand surged very considerably at the end of the sale process with 68 of the 148 eventual institutional investors making their bids in the last two days of the bidding process. On the first day of trading, shares were valued by the market at 323.5p compared to the sale price of 280p.[25] If the sale price of 323.5p had been achieved, an additional £35 million proceeds would have been obtained.[26]

21. We asked why the Department only took soundings of demand on prices up to 280p. They told us that they made their decision based on advice from Cazenove and Schroders that they would get better value from the sale if they used an indicative price range of 30p (12½ per cent). British Energy had been sold with a much wider range (55 per cent) and Cazenove's and Schroders' view was that this had not assisted the market's reception of that sale.[27]

22. We also asked whether there had not been indications at an early stage that the Department was underestimating the value of the company. There was substantial demand at 9 September before the prospectus was published and before the price range was set (Figure 3). At that date fifteen bids had already been received, covering one fifth of shares. The Department told us that there was strong resistance in the market to any price above 265p a week before the sale and they understood that a number of potential buyers had capped their bids at 280p.[28]

Figure 3: Demand for shares at 6 September 1996

23. Demand at prices of 240p to 280p was substantially greater than the number of shares available and bookbuilding had not indicated the point at which demand for shares fell away (Figure 4). The Department confirmed that there was no formal testing of prices above 280p. Informal contact by Cazenove indicated to them that institutions were not prepared to pay more than 280p and that there was a precipice beyond 280p where demand would fall away substantially. Five institutions who bid at 270p dropped out at 280p. The Department therefore took the view that they would have obtained lower proceeds if they had adopted a higher indicative price range.[29]

Figure 4: AEA Technology final institutional demand for shares

Conclusions

24. We note with concern the increase in share price from 280p to 323.5p on the first day of trading and the very substantial increase since. We are not convinced by the Department's explanation that the increase in share price was unforeseeable and attributable either to a general increase in share prices or the unforeseeable market reaction to eight acquisitions made between December 1996 and February 1998. We note that a significant rise in share price, above general market increases, took place before any acquisitions were made.

25. We are surprised at the Department's unreflecting conclusion that the rise in share price before acquisitions was attributable to the care with which the management of the privatised company explained their plans to the market following the sale. We also note that the first acquisition was made within three months following the sale. We would have expected the Department's advisers to have identified these business opportunities and to have used them as a selling point in marketing the company.

26. We note that a retained holding of 40 per cent of shares would at 29 May have been valued by the market at around £250 million compared with £90 million at the sale price. This demonstrates the significant potential value for money advantages of phasing.

27. In view of the repeated recommendations of this Committee that departments should give careful consideration to phasing, especially where shares are difficult to price, we are surprised that the Department did not, in this case, give explicit consideration to phasing.

28. We consider that the Department should have put the option of phasing to Ministers and we do not consider it relevant for the Department to pray in aid ministerial statements made during the passage of the Atomic Energy Bill in May and July 1995 against retaining a majority shareholding on a long term basis. There is a clear distinction between such a policy and an announced policy of retaining a proportion of shares to sell later when their value is established in the market. Nor are we convinced that such a statement would have posed insuperable difficulties in the market in the run up to the Election.

29. We also find unconvincing the Department's contention that they did not give explicit consideration to phasing because they saw no value for money case for it. There is ample evidence from previous sales of the significant value for money benefits of phasing. This underscores that phasing needs to be considered carefully, and makes it all the more surprising that the Department did not consult their advisers or experts in the Treasury about the matter.

30. We note that, in setting the sale price at 280p a share, the Department sought indications from institutions of how many shares they would be prepared to buy over a range of prices (bookbuilding). When bookbuilding is carried out rigorously departments can set the sale price based on a clear picture of demand for shares at various prices and based on evidence of the price at which demand falls away. But in this case, the range over which they sought bids was narrower than average and the top of the range was 280p. They therefore had no clear picture of the extent of demand at prices above 280p, the eventual share price. On the day after the sale shares traded at 323.5p, a premium of 43.5p. If the sale had achieved a price of 323.5p, an additional £35 million of proceeds would have been obtained.

31. We are not convinced by the reasons the Department gave for a narrow price range. We consider that, as the company was difficult to value, a wider range was more likely to capture the market price. Adverse reaction to a very much wider than average range used in the sale of British Energy is a reason for a range narrower than the very wide range used in that sale, not necessarily a range narrower than average.

32. We also note that, at the time the range was set, there was significant evidence of substantial early demand. We note that five institutions declined to bid at 280p but we do not agree with the Department that this was evidence that 280p was the right price. Five was a small number compared to the 148 who did bid at 280p and represented a very modest overall drop in demand.

33. Nor are we impressed by the contention that through informal contacts Cazenove assessed that their demand would fall off sharply at prices above 280p. This was not tested during bookbuilding. In addition, the share price of 323.5p on the first day of trading indicates to us that demand would not have fallen substantially at prices just above 280p.

34. We consider that the failure to identify the full extent of demand above 280p using the bookbuilding procedure represents a weakness in the way that bookbuilding was applied in this case. We recommend that departments should conduct bookbuilding rigorously so as to give as good an indication of likely demand at different prices as possible and should take care that the top of the indicative price range they give to potential investors should not constrain the eventual price set.

4 C&AG's Report para 1.20 Back

5 Financial Times Back

6 Qs 135,137 Back

7 Qs 203-204 Back

8 Qs 16-18, 55-57, 200-204 Back

9 Published stock market prices Back

10 Qs 205-210 Back

11 C&AG's Report para 3.2 Back

12 HC 298, 1992-93 Back

13 Cm 2279, 1992-93 Back

14 32 million shares @ £777.5p each Back

15 Q2 Back