The best seats in the house

00:24, Jul 27 2014

The restaurant gives a regular customer a favourite table, the manufacturer treats its distributors to a rugby game at Eden Park, the sharebroker ensures big clients get the most stock in popular share offers.

It's a time-honoured practice. Businesses work hard to look after their most valuable customers.

Yet the tradition can look out of place when the government wants to sell stakes in state-owned assets because the public expects fairness to play a part.

The initial public offer of Genesis Energy in April was a success on many levels. About 68,000 retail investors became shareholders through the IPO and have been rewarded with a share price gain of more than 15 per cent since listing.

However, it is clear from the Genesis share register from April 17, immediately before NZX trading began, that wealthy investors were able to get much larger amounts of stock than "mums and dads".

The largest chunk obtained by private investors went to American pet food millionaires Chris and Gena Weinberg, who got 1,052,400 shares.


Other identifiable allocations went to interests associated with Hawke's Bay food baron John Bostock, 856,128 shares; sharebroker Sir Eion Edgar, 818,400 shares; liquor heiress Lyn Erceg, 752,000 shares; Dunedin-based property developer Tony Offen, 650,249 shares; and Auckland-based Rich Lister Peter Masfen, 645,162 shares.

At the offer price of $1.55, those holdings represent investments of between $1 million and $1.6m.

In contrast, anyone applying for shares through the general offer received a maximum of 3226 shares, representing an investment of $5000.

Does this matter?

Firstly, I doubt anyone would be worried about wealthy folks getting the lion's share if Genesis had tanked on market. Who got what becomes an issue only when an IPO goes well.

In this case, once the government revealed the likely price range there was widespread commentary that Genesis looked attractive and those impressions have so far proved correct.

Unlike in the Mighty River Power IPO, where all retail investors had to apply for stock under the general offer, the Genesis retail offer was split into a general offer and a broker firm offer. The latter means stock is sold only to clients of sharebrokers.

According to official Treasury figures, the Genesis IPO sold 108.6 million shares to the public through the general offer and 143.6 million shares to clients of sharebrokers.

This split allocated 36 million fewer shares to broker clients than originally intended, but was clearly still weighted towards the broking firms.

A feature of the broker firm offer is that it is entirely up to each firm how to divvy up allocations to clients, so it is only to be expected that they would keep the best seats in the house for the most valuable customers.

I should point out here that I am not in this category. My broker was unable to provide me with stock and got about $3500 worth on my behalf through the general offer.

It's possible several brokers diverted small clients to the general offer in this way.

The register reveals 102.5 million shares were allocated in chunks of 3226 or less, roughly the same as the number allocated to the general offer. Thus, it's likely that pretty much every broking firm client got a bigger allocation that anyone in the general offer.

The upshot is that the level of scaling applied to wealthy clients of broking firms is invisible, which is not necessarily helpful when the government wants to be seen as evenhanded in the way it sells public assets.

Analysis of the register reveals another potential flaw in the process.

A sweetener in the Genesis IPO was the distribution of bonus shares to anyone holding their stock for 12 months. The bonus provided an extra share for every 15 held, with a maximum loyalty bonus of 2000 shares.

This meant the biggest shareholding you could have and still get the full bonus value would be 30,000 shares.

But what if an investor received several allocations of 30,000 shares - one in his own name, say, one in the name of his investment company, and one in the name of his family trust? Would he be able to get the full bonus for each?

According to the Treasury, yes.

While IRD numbers were used to identify duplicate applications, anything else was fine.

"We don't have an ability to ‘look through' to the beneficial holder of shares under each application," said a spokesman, "and once on the share register all retail investors are entitled to bonus shares consistent with the terms of the offer document."

Analysis of the register shows several examples of an individual associated with more than one allocation, including an investment banker and a property Rich Lister.

Given the value of the bonus as a part of a government share offer, it's surprising so little attention was given to ensuring it was equitably applied.

Overall, I think it is only to be expected that richer investors will seek, and get, bigger chunks of IPO stock - they have more money to invest, after all. A government seeking to maximise retail ownership would not achieve its goal if it insisted on everyone getting the same amount of stock.

However, when an offer is so attractive that several fund managers buy stock personally and even the CEO of rival power company Meridian takes a stake, the government should do its best to ensure everyone gets a fair suck of the sav.

I'm not certain that happened here, but I am happy that Genesis' share price has gone better than that of Mighty River Power.

Disclosure: Tim Hunter bought shares in the IPOs of Mighty River Power and Genesis Energy .

Tim Hunter is the deputy director of the Fairfax Business Bureau

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