The initial public offering (IPO) of the government owned private health insurer Medibank Private is shaping up to be an absolute blockbuster.
With speculation that the offering will be heavily oversubscribed and likely to be priced at the top end of the indicative price range of $1.55 to $2.00, the government is set for a windfall of approximately $5.5 billion.
Despite all the hype and the potential for a 'stag profit', at the end of the day, for serious long-term investors what matters is the price paid compared to the value received.
On this score, retail investors are unfortunately flying blind given that they are being asked to hand over their cash without knowing at what exact price they will receive shares – all they really know is it won't be above $2!
The good news is, even at $2 per share the investment case for long-term investors appears to stack up in my opinion.
It's not surprising actually. Historically, investors in government privatisations have benefitted from two positive drivers. Firstly, the IPOs are often priced less aggressively than their private equity peers. Secondly, the businesses are nearly always of a very high quality, often with certain monopolistic attributes.
Consider these previous privatisations…
CSL Limited (ASX: CSL) shares currently trade at nearly $80 and have provided a massive 1,685% return since 1999.
Commonwealth Bank of Australia (ASX: CBA) shares have gained 205% since 1999 – and much more since the bank was floated in stages at issue prices around $5, $9 and $10 in 1991, 1993 and 1996 respectively.
Aurizon Holdings Ltd (ASX: AZJ) – better known by its previous name of Queensland Rail – has gained over 60% since floating in late 2010.
Telstra Corporation Ltd (ASX: TLS) was sold in three stages, known as T1, T2 and T3. At each stage the government achieved different sale prices: $3.30, $7.40 and $3.60 respectively. With Telstra's share price currently above $5.50, T1 and T3 have provided solid, positive investment returns.
Exceptions to every rule
On the flip side there aren't too many privatisations that have left investors wanting…
The highly priced T2 was an exception, the other one is Qantas Airways Limited (ASX: QAN). Its stock price is down over 60% since 1999 and below the 1995 float price of $1.90.
So, of these nine investment opportunities, seven have turned out to be very successful with only two leaving investors feeling sore. Based on historical precedent, the odds appear to be good for investors in Medibank Private in my opinion.
