The Pricing of Infrastructure Initial Public Offerings: Evidence from Australia

Bill Dimovski (Deakin University)

IPOs and Underpricing

IPOs are common around the world. Returns on average, have been

substantial.

IPO underpricing around the world

United States Ibbotson’s 1960-9

11.4% Ritter’s 1974-82

14.8% Ibbotson, Sindelar

and Ritter (1994 18.4%.

Australia How et al 1980-89, 19.74%

for industrials and later How reports 107.2% for miners

Lee, Taylor and Walter’s 1976-89 16.4%

Dimovski and Brooks 1994-99 25.7% underpricing. Dimovski and Brooks (Gold) Mining (2008) 13.3%

Underpricing around the world

Other Countries [From Ritter (2003)]

Malaysia 104.1% UK 17.4% Hong Kong 17.3% Japan 28.4% Canada 6.3% Brazil 78.5 % China 256.9% Etc,etc

Some theoretical explanations of underpricing

Rock (1986) - IPOs need to be underpriced to continually attract uninformed investors

Leland & Pyle (1977), Welch (1989) underpricing allows for subsequent share issues at a higher price.

Benveniste & Spindt (1989) underpricing to attract investors without waiting till listing

Tinic 1988 suggests that underpricing is like an insurance -prevents against damages to underwriters/directors

Baron 1982 - underwriters discount the shares to sell easier.

Ruud (1993) - underwriters price support the issue for a short period

Uncertainty and underpricing

Beatty & Ritter (1986) greater uncertainty - greater underpricing

Larger issue size; higher issue price; older entity; more reputable underwriter; more reputable

accountant/auditor; existence of a banking &

venture capital relationships;

REIT IPO Research

United States Wang, Chan and Gau (1992) 1971-88,

87 REITs report a negative 2.82% underpricing return (loss)

Ling and Ryngaert (1997) 1991-94, 85 REITs report a 3.6% underpricing return

Japan Kutsuna, Dimovski and Brooks (2008)

0.5%

Australia Dimovski and Brooks(2006) 37

LPT IPOs during 1994 to 1999 - ave. 1.2% but not significantly different from zero. Later Dimovski (2009) sample, 2002 to 2008 REIT IPOs following the introduction of the single responsible entity role. There appears to be slightly higher underpricing.

Infrastructure Research

Peng and Newell (2008) suggest Infra entities have highest returns and highest volatility for 11 years to 2006.

A$55 billion mkt cap Useful diversification benefits Neilson (2005) suggests pension funds

have A$8 billion invested in infra assets and by 2012 could have up to A$65 billion

Newell and Peng (2008) pension funds globally considering infra investments.

US infra investments also have useful diversification benefits.

Peng and Newell (2007) suggest infra entities have monopoly attributes, high operating margins, predictable earnings and cash flow due to regulation / long term contracts. – Lower uncertainty.

Dewenter and Field (2001) HK – case study 7 infrastructure IPOs 51.1% underpricing to 18.7% overpricing

Yong (2007) current state of IPO research – no studies other than Dewenter and Field (2001)

Data

Connect 4 Company Prospectuses database. 30 Australian infrastructure IPOs Feb 1996 to June 2007 Mean underpricing 3.5%, median 0.3%. Not stat different to 0. Ave cap raising A$350m. Smallest $3.5m, largest $1.6bill. Mean money left $3.7m, median $75000. Not diff to 0. Ave time to list 41 days. Ave listing cost was 5.2%. Ave forecast div yields – 6.87%.

Models Day 1 Return = Size of cap raising, Market sentiment, Time to list, Percentage total cost, Whether underwritten, Forecast dividend yield, (1).

Money left = size of cap raising, market sentiment, time to list, percentage total cost, whether underwritten, forecast dividend yield and (2).

The Results Table 2 – Underpricing – partitioned underwritten issues - positive and

significant relationship between div yield and higher first day returns; perc total cost and higher first day returns.

This suggests that those that forecast higher divs may have higher uncertainty about them and offer a higher return to subscribing investors. Similarly those that pay more in direct costs to list have more uncertainty about their value.

Table 3 –money left - a negative and significant relationship between proceeds and money left.

Larger infrastructure IPOs leave less money meaning they are priced more accurately

Summary

Infrastructure IPOs do not have significantly different to zero first day return or money left characteristics

Not a great deal of uncertainty about their valuation – consistent with Peng and Newell (2007) – predictable cash flows, captive customer base, barriers to entry etc.

It appears that given the substantial amounts of new equity raised in this area of infrastructure IPOs, bankers may be working particularly hard on appropriate valuations.