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Any other business

Twenty-five years on, the game begins again

Richard Northedge says the gimmicks used to sell BT will soon have to be dusted off for RBS and Lloyds

14 October 2009

12:00 AM

14 October 2009

12:00 AM

In the autumn of 1984, solicitors were allowed to advertise for the first time, but if the public failed to spot their modest announcements it was probably because the newspapers were awash with a much more unusual publicity blitz. The government was selling half of British Telecommunications, as the phone company was then called, and it needed the help of people who had never previously owned a share. The BT flotation was the start of a phenomenon that was as much a part of the decade that followed as Bros, the Pet Shop Boys or Wham! Buoyed by a bull market, the government used the BT model to sell £80 billion of nationalised industries, balancing the government books and creating a new generation of equity holders.

BT was not the first privatisation. That honour went to British Aerospace in February 1981, but the sums were small — just £150 million compared with the £3.9 billion the initial BT sale would realise. Cable & Wireless followed, with Britoil and the X-ray technology firm Amersham the following year. But these were sales aimed at City institutions rather than the general public and their newspaper advertisements were grey tombstones of small print, not the racy display ads designed to attract buyers for BT.

Some of the early privatisations, such as National Freight Corporation and Sealink, were not aimed at the stock market at all; instead they were conducted as trade sales or buy-outs, such was the perceived lack of investor interest. Indeed, if political interest was low too — privatisation did not even feature in Margaret Thatcher’s 1979 manifesto — it was matched by doubts in the City as to the appetite for so much equity.

But by mid-1984, when Associated British Ports, Enterprise Oil and Jaguar had been floated off too, ministers realised the goldmine of state assets they were sitting on even if the Square Mile was unconvinced that an issue as large as BT was possible. No flotation in the world had realised anything close to £4 billion and a whole new set of tricks had to be invented. That meant aiming the issue at overseas investors and private individuals for the first time — not so much to stimulate popular capitalism for ideological reasons, but to attract more potential buyers. So the pattern that was employed for the next decade was formed: roadshows, global book-building, pre- registration, television and press campaigns, loyalty bonuses for those who held on, discounts to encourage employees to invest, and part-paid shares to defer the outlay. Kleinwort Benson and Rothschild ran a conveyor belt of privatisations and sold the model abroad.

The background to the BT flotation was not auspicious. The six-month miners’ strike was dragging on; in late September, the collapsed bank Johnson Matthey had to be rescued by the Bank of England; and the IRA’s bomb devastated the Conservatives’ Brighton conference. Yet the marketing worked. The BT issue in mid-November was more than three times oversubscribed and the 50p part-paid shares almost doubled on their first day of trading. The popular privatisation was born.

State assets were floated off as fast as they could be made ready and lapped up by small shareholders. Within days of BT’s market debut the government announced the flotation of the Trustee Savings Bank, which reached the market in 1986 just ahead of British Gas. The next year, British Airways, Rolls-Royce, and BAA spewed out in quick succession, followed by the state’s remaining holding in BP. After British Steel, ministers privatised 11 water companies on one day in 1989 using the BT model, then ten electricity companies simultaneously the following year, and the two generators and two Scottish power companies in 1991. The rest of BT was sold in 1991 and 1993 with new advertising campaigns, each tranche realising more than the original 1984 sale.

Even the short but memorable market crash of October 1987 did not halt the stream of issues. Privatisations reversed the long-term decline in private share-ownership; and when the supply of state assets ran out, building societies picked up the baton, demutualising and dishing out their shares to customers.

It is likely that New Labour would have continued the privatisation programme had there been anything left after British Energy and Railtrack. Coal had been sold privately and the sales of Ulster’s power company and Forth Ports showed that the barrel was being scraped. Labour sold its last shares in Mersey Docks but returned to the Tories’ past privatisations to raise real money — by a windfall tax on companies that had been sold too cheaply.

Labour inherited a cupboard stripped of family silver. What remain are items like Royal Mail, Channel 4, the canals, the mint and the nuclear industry — everything that’s too difficult, politically or financially, to sell. Investors’ appetite diminished too: the market plunge after the dotcom bust left many privatised shares looking sick. By 2003, BT, Rolls-Royce and British Steel were among shares worth less than their 1980s privatisation prices; Railtrack was renationalised and British Energy almost bankrupt. BT asked its investors to stump up another £6 billion in a rescue rights issue. Even now the company is worth just £10 billion compared with the £20 billion subscribed for its shares over the years: demerging the O2 mobile phone business gave punters bonus shares worth £6 billion, but unless they held on until O2 was taken over by Telefonica of Spain, they would be showing a loss on their 25-year venture.

The legacy of the privatisation programme was to make a portfolio of cash-guzzling state industries into profitable companies, even if many, including British Steel, Jaguar, BAA and half the utilities, as well as O2, are now foreign-owned. The mistake of the programme was to turn inefficient state monopolies into private monopolies that had to be broken up later, damaging their market values.

Yet what goes around comes around. Gordon Brown said this week he will raise £16 billion to reduce public debt by a national car-boot sale of assets such as the Tote and the Channel Tunnel rail link — plus anything saleable in the ownership of local authorities. But meanwhile Labour has restocked the bare cupboard it inherited. Railtrack and the East Coast rail franchise have been returned; the state bought back into British Energy and resold; and the shiniest of new family silver is Bradford & Bingley, Northern Rock, most of RBS and much of the merged Lloyds and HBoS. Sooner or later these will have to be privatised again and a new generation of bankers and investors will have to learn again the lessons of BT.

The bank sales could realise as much as the whole of the Conservatives’ privatisation sales and each share offering could dwarf any of those previous flotations (if the proceeds are much less, the taxpayer will be out of pocket). Yet again the government will be targeting overseas investors and private individuals; yet again we can expect an advertising blitz and global roadshows.

There may be new tricks — BT was floated long before the internet came into our lives — but the basic model will be the one devised a quarter of a century ago. BT was sold in three tranches over nine years: the banks are likely to need at least as many offerings and could take at least as long to clear from the government’s books.

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