Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Don’t tell Sid. The UK government’s bid to broaden the share-buying populace, through the proposed partial sale of its 36 per cent holding in NatWest, is a far cry from the glory days of the 1980s and 1990s.
In that era, under then-prime minister Margaret Thatcher, a host of utilities and other one-time monopolies passed from public to private hands. TV viewers were carpet-bombed by ads — most famously featuring Sid, whom a cast of Brit stereotypes were urged to tell about the offer of shares in British Gas.
They did. The proportion of adults holding shares more than trebled during the 1980s, from around 7 per cent to 25 per cent, according to a working paper by David Parker of the Cranfield School of Management.
These privatisations “summed up the Thatcher years”, reckoned former Conservative chancellor Norman Lamont. Ten chancellors later, Jeremy Hunt wants “to get Sid investing again”.
Government money men are not all that has changed. So too has the investment landscape. Shiny new toys like crypto grab more attention than shares among the latest generation of newbie investors: nearly 5mn adults owned crypto assets in August 2022, according to the Financial Conduct Authority, more than double the figure a year earlier. So much for burnt fingers.
The moribund UK stock market offers little to compete. Financial services, industrials and utilities lack the same lustre as tech stocks in the US. Stamp duty and taxes cut into gains. Little surprise, then, that the UK has less direct share ownership by retail investors than countries like the US and Sweden.
Neither is NatWest a catalyst for change. It is not a privatisation; the government is simply selling down — in parcels — shares held as a legacy of the financial crisis. State sell-offs in the 1980s and 1990s promised a whole new way of doing business, bringing in (at least theoretically) cost efficiencies and productivity gains. Private sector ownership, along with discounted share prices and other incentives, left plenty of upside for novice share owners.
By contrast, the NatWest coming to market is a vastly improved — if shrunken — version of the one taxpayers bailed out in 2008. Years of derring-do, culminating in the takeover of ABN Amro, left it with a swollen balance sheet of £2.2tn — roughly three times the current size — and a presence across the globe.
Today barely 5 per cent of income is derived from outside the UK and Ireland. A return on tangible equity of 17.1 per cent for the first nine months of last year beats that of peers like Barclays by a long way. The hefty 7.1 per cent dividend yield, magnified by the government share overhang, is in a class of its own.
Less comfortably, the bank is without a permanent boss after Dame Alison Rose’s departure in the wake of the “debanking” of Nigel Farage, former leader of the UK Independence and Brexit parties. Shares, down nearly 30 per cent in the past 12 months, have massively underperformed.
If neither NatWest nor the backdrop are conducive to broadening share ownership as the government wishes, does it matter? Retail investors’ sentiment can turn on a dime, making them far less stable holders than fund managers. By definition they have less clout with company boards.
As a bunch, retail investors flip shares more frequently than their institutional peers. “Bed and breakfasting” privatisation offers was standard practice. According to EY, nearly a quarter of the 2.2mn initial shareholders in BT sold out within six months.
Reddit IPO targets low float and low valuation
In the US, a different sort of stakeholder may need convincing about the listing of social media platform Reddit.
In Reddit’s r/stocks forum, the social media network’s own users take a dim view of the company’s upcoming initial public offering. “RIP Reddit, it all goes downhill from here”, is the general view. Users expect public company status to result in more ads and doubt the company’s ability to turn a sizeable profit. They should also be keeping an eye on the size of the float.
As the US IPO market stutters back to life, Reddit has renewed plans to list. The penalty for waiting is an expected $5bn valuation, half that at which it raised funds in 2021. This cannot all be attributed to changes in the market environment. Digital advertising growth at Facebook parent Meta, the world’s largest social media network, has pushed that company to a record high market cap.
Reddit, founded one year after Meta, was slow to attract advertisers and move to mobile, launching an app eight years after Facebook’s. With 70mn daily users, it has 2 per cent of Meta’s global audience. Revenue, mostly digital advertising with some premium subscriptions, is just 0.6 per cent of Meta’s. In 19 years it has yet to report an annual profit, though lay-offs could produce positive net income in the final quarter of 2023 — which would give listing documents a boost.
There are some benefits to waiting. Reddit has had time to move closer to profitability, clean up content and make the unpopular but lucrative decision to charge third parties for access to its application programming interface or API. The API gives third-party apps access to Reddit data. These changes put an end to the social network’s homespun origins and add a new revenue stream.
At $5bn, Reddit would be valued on a multiple of just over six times estimated trailing sales. That would put it well below both Meta and online scrapbook Pinterest. It would be valued at roughly the same multiple as Snap, despite growing at a faster clip.
Compare Reddit’s IPO to Snap’s and it is clear how interest in social media has changed. When Snap went public in 2017 its listing price valued the company at about 60 times trailing revenue. The co-founders were able to grant themselves voting control. Yet the messaging company, which has also yet to announce a full year of profit, still trades below its IPO price. On Monday, it announced plans to lay off a tenth of its workforce.
