February’s float of Qinetiq was the latest in a long line of privatisations by the British government. Over the last 20 years both Labour and Conservative governments have sold off previously state-owned entities mainly in the utilities, transport and telecommunications sectors. The advertising campaign for the privatisation of British Gas, with its ‘Has anybody seen Sid?’ slogan is remembered by many as the beginning of a new age of share ownership.

Sids and Henrys

“The early privatisations basically meant that the uninitiated could buy stocks,” explains Seven Investment Management’s Justin Urquhart Stewart.

“In 1979 there were four million shareholders in the UK, then after a few years of being around 13 to 14 million that number jumped up to 18 million with the demutualisation of the Halifax in 1997.”

The typical ‘Sid’ share owner collected a couple of the first privatisations and hung on to them, according to Urquhart Stewart. “There were a few Super Sids too,” he adds wryly, “who bought a number of stocks. Henrys, they were called.”

Over the course of the privatisation years the Sids and the Henrys were invited to invest in water companies, electricity companies, transport companies and manufacturers. “In simple terms if you’d kept your utilities you’d have done well,” says Julian Chilingworth, chief investment officer of Rathbones. “Where you’re invested in a stable industry like electricity and gas as a private investor, if you’d kept the shares, you would have done well because the premium that is likely to be paid for security of supply is going to be high. They all came initially with quite high yields too, so you would have had income and growth.”

Since the initial privatisations many of the companies have changed beyond recognition, with new names and diversification into other areas. BAA has recently been in the news again for having been targeted for takeover by Spanish infrastructure group Ferrovial. Shares of the company, which was privatised in 1987, saw a 20 per cent rise. Until 2003 it was protected from hostile bids by the UK government’s golden share, a stake it kept in many of the former national companies which was ruled illegal in 2003 by the EU.

Demutualisations

From 1989 more share-buying opportunities were made available to the British public as a number of financial institutions demutualised. Among them were companies such as Abbey National, Bradford & Bingley and Halifax. The ‘windfall shares’ for members of the societies offered instant cash, or the opportunity to continue as a part owner of the newly public entity, in the hope that the shares would gain more worth over time.

Members of the demutualising building societies were generally given a minimum number of free shares. In 1997 with the demutualisations of Alliance & Leicester, Halifax and Northern Rock in April, June and October members were offered 250, 200 and 500 shares. Their windfall value was £1,356, £1,465 and £2,260, respectively.

Looking at the share value of these companies now shows that they have all grown over the last nine years. Alliance & Leicester has doubled in price, Halifax Bank of Scotland (HBOS), as it is now, has grown from 732p to 1,051p and Northern Rock has more than doubled from a price of 452p per share in 1997 to 1,150p now. Furthermore, the companies have all provided dividends along the way. Accumulated dividends and share growth would now mean that members would be sitting on £3,607, £2,524 and £6,473 respectively.

“People should very much not have gone for the windfall cash,” says Alistair Hodgson, stockbroker with Pilings in Manchester. “You’d have been far better off keeping the stock and, in fact, some of the demutualisations have been better than I thought they would be. Northern Rock is an excellent example: it was never the biggest but, in my opinion, the management of the company is very efficient, and as a plc that company has flown. You only have to look at the share price to see that.”

Northern Rock is very much the favourite among the former building societies. “They have a successful management, and because of that, you would probably have made the most money there,” explains Chillingworth. The company’s average annual return since demutualisation has amounted to around 13.3 per cent per annum.

Bradford & Bingley, which demutualised in 2000, is Hodgson’s least favourite of the financials. “They were slow to take off,” he says. Shares in the group are now worth around 470p, having kicked off at 248p.

“It’s only the fact that interest rates haven’t risen that has given B&B their second or third wind, and, I think, this homeloan business is an awkward one to be in,” says Hodgson. “I don’t find 470p good value for that share and would prefer [to own shares in] the commercial banks like Lloyds and RBS.” The fact remains though that B&B’s share price has risen in the time that the company has been listed.

Many of the companies, like Halifax with its BoS merger and Woolwich, which was bought by Barclays, have changed along the way into completely different entities. Abbey is another notable one, having gone from a UK building society which demutualised in 1989 to part of Spain’s largest bank, Santander. Abbey’s shares were delisted from the London Stock Exchange in 2004 as part of the Groupo Santander takeover, prompting some worry among shareholders.

The acquisition was made for £6.50 per share, with a special cash dividend of 31p per share. In February, Santander announced that former Abbey shareholders who received Santander shares in November 2004 saw the share value of their investment rise by more than a quarter since then. Including the five dividends paid by Santander since the acquisition, plus a special 31p dividend paid in December 2004 under the terms of the take-over, the total return to shareholders was 41 per cent (up until 15 February 2006).

Science and circumstance

However, should investors be looking critically at their privatisation and windfall share collections? “You come across people whose portfolios are solely demutualisation and privatisation shares,” says Hodgson. “Now, if you have to get lumbered with a set of stocks I can think of a lot worse. Being overweight in water, power, mortgage banks and telecoms isn’t all that bad.”

A study from stockbroker Hargreaves Lansdown found that if £100 had been invested in each of the major privatised companies when they came to market – which would have totalled £2,800 – this would have been worth £33,000 by March 2004. Hargreaves’ head of UK equities Richard Hunter comments: “The tendency is for people simply to lock these away in a drawer and forget about them, but this isn’t always the most sensible option.”

Rather than forming a balanced portfolio, these kinds of collections of shares are little more more than just a set of companies with no thought attached to how they work in regard to each other.

“The Sids and the carpetbaggers have got a good collection of companies given to them by these mass-market circumstances,” says Hodgson. “But they’ve got no right really even to call them portfolios, because they haven’t been constructed. They’ve come together out of a variety of circumstances and with no real science.”

On the other hand, opportunism is a big play in investment, Hodgson adds, and what people should be doing is considering their stocks in a wider context and figuring out how to make a portfolio out of them.

“Really, the levels of knowledge in the investors of these things was low when they were being bought,” says Urquhart Stewart. “There was no concept even of fixed interest for example.”

So the advice is to step back and take a look at these collections of stocks with a portfolio eye, and see if other holdings need to fit in around them to diversify asset and sector risk. There is no purpose in selling the fromer building societies just because they were free, says Hodgson. The trick is to consider them on their merits now as investments going forward and alongside other holdings. This should show whether profit should be taken and reinvested, whether the whole holding should go and whether the portfolio is overweight in a category of stock such as financials or utilities.

The financials are worth a good hard look, according to Greg Smith, MD of equity research company Fat Prophets. “We’ve seen many banks coming out with their results recently,” he says.

“And we are still negative on them. We think there are better places to put your money because, although they offer good yields, many of them have been raising their bad-debt provisions. The worry is that this easy lending they’ve been doing may come back to bite them.”

It’s fair to say that a couple of the government privatisation stocks have done very badly. Railtrack and British Energy are the notable ‘duffers that hit the buffers’.

Hodgson is reluctant to play the blame game. “I don’t think really you can say: ‘You sold me a pup, Her Majesty’s Government,’” he says. “It’s never good if the government sells something to the public and then the business fails, but people might say that Railtrack went because of third-party factors, not that the government knew it was going to go bump so got rid of it.

“Investors take risks every time, and if what we’re saying is a couple of these privatisations went wrong, it’s not too bad out of all of them.”