Fund managers should face up to their own Medibank mistakes

The institutions who bid to be in the Medibank float made their bed, and now they must lie in it.

One of the more bizarre, and risible, developments in the aftermath of the Medibank Private float has been the moaning from fund managers that the float was overpriced.

With the shares trading around $2.10 each, against the $2.15 the institutions paid, they are obviously marginally in the red in these first few days of trading. But whose fault is that?

Mathias Cormann’s overriding obligation when he signed off on the final institutional price was to get the best possible price for taxpayers from the sale of a valuable publicly-owned asset.

The $5.7 billion raised, which placed Medibank on quite stretched multiples of its near-term earnings, meant it was a job well done. Had there been significant stag profits for the institutions in the first few days of trading, Cormann would have been heavily criticised, quite legitimately, for selling the taxpayers’ interest short.

A secondary obligation, and a political consideration, was to try to reconcile maximising the value extracted from the float with the protection of the retail investors who ended up with 60 per cent of the shares. The $2 a share cap on the retail price appears to have done that, without being too generous.

The obligation to institutional investors was simply to give them an opportunity to buy, or not buy, shares in the float.

These are supposedly sophisticated investors. They were under no duress to bid and the price at which they did bid was of their own choosing. There were a number of large institutions that don’t hold Medibank shares today -- which came to a different conclusion about the price they were prepared to offer. Time will tell which institutions made the smarter decisions.

Sure, the clever way the institutional book-build was managed put some pressure on those institutions who wanted to be sure of getting stock to bid early and aggressively, but the price at which they bid, and the volume of shares for which they bid, was entirely their decision.

In aggregate the institutions set their own final price, so it is bemusing that some of them are now complaining that they paid too much. Given that the institutional component was well covered at the $2.15 a share final price, they should be counting themselves fortunate that Cormann didn’t set the price a little higher.

The other aspect of the whingeing about the pricing of the float is that the institutions would know, or should know, that the trading in the stock this week reflects the price of the marginal transaction in a register that has yet to properly settle, not the value of an entire company with a more mature register.

We know that a number of institutions don’t have an index weighting in the stock, which is around the cut-off point for the ASX top 50 and which will shortly be included in the MSCI index.

For those fund managers following index-driven or index-related strategies, there will be a need to accumulate an exposure to the shares, which ought to provide something of a floor under the price, albeit one subject to the broader market conditions.

While there are those who are trying to link the performance of Medibank shares in the aftermarket to the prospects for other potential privatisations like the Australian Securities and Investments Commission’s registry business, or Defence Housing, that’s a nonsense.

If and when Cormann brings another publicly-owned asset to the market its value will be assessed independently of whatever has happened to the price of Medibank shares, and some institutions will bid higher and more aggressively than others to ensure they get the volume of stock that they want.

It will be their responsibility alone if they end up paying too much. Cormann’s responsibility is to ensure, in the market circumstances of the day, that at the point of sale he doesn’t transfer any significant value from taxpayers to private investors. So far, in the Medibank float at least, he appears to have discharged that responsibility well.

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