At least make the Medibank float fair

The banks appear to have won the day on FoFA reforms, but Mathias Cormann has a chance to redeem himself somewhat if he chooses a transparent, on-market bookbuild for Medibank.

The federal government will soon ‘unpause’ its disembowelling of the Future of Financial Advice legislation, and the word from the industry is that there will be virtually no change.

It looks like the hopes of the Financial Planning Association and consumer groups that Finance Minister Mathias Cormann would rethink his craven capitulation to the banks in the fruitless pursuit of lower costs for savers will be dashed.

Government staffers are advising that the client opt-in requirement will be binned, as planned, sales commissions will be reintroduced for general advice, the general requirement to act in the best interests of clients will be ditched and, worst of all, advisers will be allowed to limit the scope of their advice by agreement with clients, allowing them to only advise on (ie sell) their employers’ products.

It will be a bleak, inglorious day in a couple of weeks when the Coalition re-exposes the savings of Australians to total loss due to commissioned sales masquerading as financial advice, but there is an opportunity for the Finance Minister to redeem himself to a small extent, if he wants.

He should float Medibank Private using a transparent on-market bookbuild, instead of handing it to the banks.

The nation’s investment banks have completed their pitches for the $4 billion job, and the government and its adviser Lazard Australia have chosen three: Deutsche Bank, Macquarie and Goldman Sachs.

It’s understood Lazard and Mathias Cormann have driven a hard bargain -- getting the lead managers’ fees down to less than 1 per cent, compared with the usual 2-2.5 per cent.

Normally the three investment banks would run a private bookbuild process in which their favoured institutional clients would bid for stock to set the price, which would then determine the price of the retail portion of the float.

A new company called On-Market Bookbuilds, launched last October with the support of the ASX, offers a fully transparent on-market process for pricing placements and Initial Public Offerings. The government should use this platform to sell Medibank Private.

So far there have been five relatively small IPOs and placements totalling $100 million under the on-market bookbuild system, which have established that it works.

Unlike the normal off-market IPO processes, the ASX BookBuild facility is governed by the market integrity rules that apply to all secondary trading: fairness, transparency and efficiency.

Importantly, it ensures that anyone can participate in the IPO, not just the institutional clients of the lead managers. All are treated equally and transparently no matter which broker they use. 

The Finance Minister should take note of the recent Royal Mail IPO in Britain, which turned out to be a political disaster because taxpayers were shortchanged by about £1.2 billion through a traditional off-market bookbuild.

The float was lead-managed by some of the most prominent banks in the world, but they completely misjudged the level of demand and the price jumped 38 per cent on its first day of listing.

Even worse, Lazard -- the British government’s adviser on the float, as it is here with Medibank Private -- was one of a group of cornerstone investors who sold their interest within weeks of the listing. Lazard scandalously made a profit of £8 million within a week.

If the ASX on-market bookbuild process is used for Medibank, that couldn’t happen because the government would set the price in light of the demand that comes into the book.  

Using an on-market bookbuild to sell Medibank Private would transform the business of capital raisings in Australia.

Investment banks have been resisting the platform; indeed they have been heaping scorn on it because it gives them less control. If it were used for a retail float as big as Medibank Private, it could no longer be ignored.

Opening up IPOs in this way would only be a small step towards reversing the disheartening surrender to the banks inherent in the FoFA reforms, but it would be worth doing.

Related Articles