Lloyds Banking Group shouldn’t get too cocky in the wake of the sharp rise in Royal Mail’s shares. The state-backed British bank may be tempted to focus its next share sale entirely on retail customers after strong demand sent the postal service’s shares up 36 percent in their first few hours of trading. But the differences between a Lloyds secondary offering and Royal Mail’s primary one warrant a different approach.
Provided Royal Mail doesn’t tank any time soon, its listing clearly helps the government sell its remaining 32.7 percent stake in Lloyds. After September’s successful 3.2 billion pound ($5.1 billion) sale to institutional investors, the bank could look at selling another 10 billion pounds ($15.9 billion) of shares when it returns to the market some time after March, bankers reckon. Proof that retail interest is there, too â€" the retail portion of the Mail’s initial public offering was seven times oversubscribed â€" will help.
But strong demand for mail delivery shares may not translate into strong demand for bank ones. Lloyds shares are traded in the market, so investors can already see what it is worth. A reduced chance of a Royal Mail-style bounce will dampen demand.
The price the government paid for its Lloyds bailout also matters. The government’s sale of some of its stake in the bank to institutional investors in September valued the company at a small premium to the effective 73.6 pence per share at which the government bought its stake in 2008. Having trumpeted its feat of turning a profit, the state will be loath to sell future tranches below this level. But with the shares already trading above the book value at 76 pence, the scope for a retail-friendly discount is currently limited.
Big retail offers are also hard to execute. Unlike the accelerated sale last month that wrapped up Lloyds’ first tranche in a few hours, retail offers can drag on for over a week, giving hedge funds ample time to short the stock. Retail buyers are more likely to sell immediately, rather than provide the long-term support that companies prefer.
Of course, an improving British economy could leave Lloyds shares more highly rated come the spring. But even if this happened, the bank would be better off restricting its retail sale below Royal Mail’s 33 percent. Anything more could backfire.
