The Motley Fool

Will the Medibank Private IPO be a dud?

Unless you’re living under a rock, you won’t have been able to avoid the barrage of news, views, and offers on the upcoming sale of ‘your’ Medibank Private by ‘your’ government to guess who…’YOU’!

It’s pretty awesome when you think about it – a company you already own is being sold back to you! That’s marketing at its best!

Before I discuss the reasons why I think taking part in this initial public offering (IPO) makes sense, let’s take a moment to think a bit more about the nature of IPOs.

Some stock market parlance: ‘Don’t be late to the party’; ‘you’ve got to keep on dancing until the music stops’; ‘it’s only when the tide goes out that you see who’s been swimming naked’

– These are just some of the great lines that are applicable to the IPO machine and they all conjure up images of investments (read: ‘speculations’) gone wrong.

IPOs are inherently dangerous because you have an informed seller flogging stock to a less informed buyer. The marketing machine of bankers, lawyers, vendors and stock brokers who have their hand out for a cut of fees and proceeds means investors rarely get an unbiased, independent view.

In fact the bigger the IPO – and they rarely get much bigger than government privatisations – are the ones where an independent view is the hardest to find.

This stock spruiking also gets more extreme the later in the IPO cycle. It’s possible we’re nearing that point with one leading fund manager recently opining that there was “quantity over quality” appearing in the IPO pipeline – a sure sign that the market is hot but not in a good way.

The problem is the later into the “party” you stay (or the longer you keep dancing) the more crazy things generally become. The quality of companies on offer declines, the ridiculousness of prices asked increases and the risk of being left holding poor quality, overpriced IPO stock increases.

Buyer Beware: There is certainly no rule that an IPO must be successful.

As a case in point – consider the recent demise of education training group Vocation Ltd (ASX: VET) and the appalling listed life of transport firm McAleese Ltd (ASX: MCS).

Shareholders were stunned this week when Vocation’s shares went into free-fall – the stock is now down 49% from its first traded price. Meanwhile, McAleese’s share price is down a whopping 76% since its listing.

The Vocation case is particularly interesting as it has been brought down to earth by concerns over the possible loss of critical government contracts. Doing business with government can be a blessing but also a curse!

Could Medibank Private go the way of Vocation?

While it would seem an unlikely scenario, Vocation’s experience should give pause for thought to investors considering the merits of Medibank Private. The private health industry is dependent on government regulatory policy and largesse – there is nothing stopping a future government from dramatically changing the private health landscape. The potential for massive fallout across the industry from changed policy is very real and while it may not happen (soon at least), long-term value could be hindered.

Everyone is clamouring for stock

Sources suggest that the Medibank Private IPO will be heavily oversubscribed; this most likely will mean the final price set for buyers will be much closer to the $2 high mark than the $1.55 low mark.

Who cares! Jump aboard anyway

Despite a number of reasons to be wary of IPOs in general, the Medibank Private IPO offers some appeal.

Aside from the appalling structure which requires retail investors to apply for shares without knowing the price they will pay, the offer remains tempting.

It is a high quality business.

Its earnings will increase thanks to cost-cutting measures which are inevitably achieved when a company moves from government to private hands.

Institutions are unlikely to receive their desired allocations in the float which should lead to a buoyant secondary market for Medibank Private stock.

Most importantly, even at the high price of $2 the stock looks roughly fairly valued. This means you’re not getting a bargain and the stock may not outperform the market but you are paying a fair price for an above average business.

If none of those reasons are enough to convince you then perhaps the actions of this oil man (in a joke told by none other than Warren Buffett) will…

A dead oil prospector gets stopped at the pearly gates and is told by St Peter that Heaven’s allocation of miners is full up. The speculator leans through the gates and yells, “Hey, boys! Oil discovered in Hell.” A stampede of men with picks and shovels duly streams out of Heaven and an impressed St Peter waves the speculator through. “No thanks,” says the sage. “I’m going to check out that Hell rumour. Maybe there is some truth in it after all.”

5 stocks under $5

We hear it over and over from investors, "I wish I had bought Altium or Afterpay when they were first recommended by The Motley Fool. I'd be sitting on a gold mine!" And it's true.

And while Altium and Afterpay have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $5 a share!

*Extreme Opportunities returns as of June 5th 2020

Motley Fool contributor Tim McArthur plans to apply for shares in the Medibank Private IPO.

Related Articles...