Sometimes, when a company comes to the market asking for money, you wonder how on earth it manages to find willing investors. The enterprise seems absurdly overpriced, or requires suspension of disbelief that defies rational analysis, so when AO World went public three years ago, the FT was not alone in musing how a distributor of washing machines could justify a glamour rating.

Such was the fight to get aboard that most investors were turned away, helping to create a scramble for stock, and a 40 per cent premium on the first day of trading, valuing the business at six times sales. It all looked very odd, from the £20m in fees (£12m to Rothschilds) it cost to raise £60m, the hefty share sales by the founder, and the highly unusual share register unearthed by FT Alphaville.

Reality, with a profit warning less than a year after the float, big sales of shares by directors, management changes and a £50m fund raising, is arriving. The bulls say that with the shares down by two-thirds, it has arrived. The bears still cannot see a case for just another durables retailer even now, and suspect that the sale of extended warranties on appliances which hardly need them is propping up the business.

Compared with last week’s other new issue disaster, AO looks like a success. The 2011 document describing the “value opportunity”  that became Genel Energy now reads like a parody of the South Sea Company prospectus. Perhaps it was not designed to confuse, although calling the company Vallares, and explaining that it was “modelled on Vallar, the cash shell” hardly helped, considering the labyrinthine structure of Nat Rothschild’s other vehicle.

This triumph of the dealmaker’s art extracted £1.33bn from supposedly sophisticated investors like Schroders, Blackrock and Scottish Widows. The founders, Mr Rothschild and BP’s former boss Tony Hayward, were awarded £164m in shares.

Genel has certainly been unlucky. The collapse in the oil price, war’s impact on its Iraqi concessions, and the failure of its major asset to live up to expectations have not helped. The woes have been compounded by internecine strife on the board, and from the £10 issue price the shares have collapsed to 89p today. Both men have now gone, and a third of the shareholders voted against the remuneration report.

The moral of these two sad stories of new issues is clear. If something looks absurdly overpriced, it probably is. And avoid any business with a structure that cannot be explained in a (shortish) sentence.

…and still on new issues

There’s quite a head of steam building up to stop Saudi Aramco floating in London. The company might struggle to comply with the Slavery or Bribery Acts, it might baulk at boardroom diversity, its governance might be suspect, its connection to London is tenuous, but the real problem is its sheer size.

Even if it is worth only (only!) £900bn, a float of the 25 per cent minimum needed for a “premium listing” and inclusion in the FTSE 100 index would make it the biggest constituent by a country mile. Even the mooted sale of just 5 per cent would test the depth of London’s markets.

The UK Investment Association argues that this too small a slice for inclusion, but this is a canard. The rule was designed to discourage companies of dubious parentage and poor liquidity, while Aramco is a well-established, properly-run business. There would be no practical difference between 5 per cent and 25 per cent from a governance viewpoint.

Nobody has to buy this share – except, of course, the tracker funds, if it’s in the index. To which the obvious response is: tough. Tracker funds are supposed to follow the market, not to lead it down the cul-de-sac of passive investment. Nobody has to buy a tracker, either, while Lex calculates Aramco’s weighting at a 5 per cent float as about the same as National Grid.

Besides, there is much more at stake here. Aramco could be the first major premium listing since the Brexit letter. The decision will be interpreted either as a symbol that Britain is open for business, or that one of the world’s most important stock markets is inflexible and turning inwards, just as the remainers always feared.

This is my FT column from Saturday.

 

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