After 7 years, it’s finally here

UK Chancellor Osborne has confirmed the launch of a £2bn discounted Lloyds share sale to the public. This follows months of speculation whilst the UK government sold down its £20bn 2008 bailout stake to institutional investors, much to retail investor frustration. The share offer is George’s way of saying sorry.

The offer will be managed by the Treasury on behalf of the government who will determine structure and pricing, however, timing is seen as March 2016, before the end of this financial year. The offer will be the final step in the government’s return of its Lloyds bailout stake to the market wilds.

The Lloyds re-privatization is well on track with a 43% bailout stake having already been steadily reduced to just 11%. While sales have so far netted the UK taxpayer a small profit, and most importantly not harmed the share price, retail investors/taxpayers want their bailout shares back, but with a discount for their trouble.

By our calculations the proposed offer could be very attractive for subscribers. Ensure you don’t miss your chance to get your hands on a discounted slice of a major bank on the mend and on the up.

Register with Accendo Markets now!

Deal of the century

1. A public share offer for £2bn in shares (3.6% stake) of Lloyds Bank Group (LLOY)
2. The offer is only available to UK residents
3. The shares will be offered at a 5% discount to Lloyds’ market price at the time of the offer
4. Those applying for £1,000 or less will be prioritized
5. Those still holding the shares after 1 year will receive a bonus of 1-for-10 (max value £200)

Huge demand

Expressions of interest have already topped 250,000, meaning the offer is proving immensely popular. This is not surprising given the popularity of the banking blue-chip which can be considered a delayed recovery play after heavy restructuring on an improving UK economy (business, property).

With interest already five times that for the Royal Mail IPO (sold off in Oct 2013 via the biggest UK IPO in 7 years) the strong interest in the Lloyds offer and likelihood for heavy oversubscription suggests potential for a strong reaction to a share offer that will return the bank to full private ownership next year.

Recovery potential

If anything, Lloyds has more recovery potential than Royal Mail, a business suffering from less letters being written, on-line retail using alternative distribution channels and trades unions making life difficult. While higher interest rates could boost Lloyds margins, there may also be light at the end of the PPI tunnel – a potential end in 2018 to claims for mis-sold payment protection insurance (£13bn set aside so far).

Lloyds has already recovered from the financial crisis well enough to post profits of £1.2bn for the first half of 2015 and expectations are for another £1.4bn in Q3 profits at the end of the month. It has also resumed payment of dividends (0.75p, 1% yield) which had been suspended for six years. With banks among the biggest UK Index dividend payers pre-crisis, yields could return to 7%.

Attractive returns

A quick look at the deal structure and the offer looks very attractive for subscribers willing to stay the course for a year, even without any capital appreciation via share price gains. Based on a £1,000 investment, the deal structure suggests you could;

1. Save yourself £50 via the 5% discount
2. Net yourself dividends of circa £50 (2015 final + 2016 interim dividends)
3. Net a £100 in bonus shares for a year’s loyalty (max value £200)

The above implies a potential gain of £200 to £300; a 20-30% return on investment.

Add to this any future dividends (possibly even a special dividend) if you hold the shares for longer than 12 months and the returns are even more compelling compared to the miserable low single-digit interest rates (if you’re lucky) being paid on the best UK savings accounts.

A very strong alternative home for your cash I’m sure you’ll agree. And these returns don’t even factor in any potential share price upside towards the broker consensus average target of 92p per share.

If anything, the 5% discount and 10% loyalty bonus could be viewed as a 15% cushion for shareholders in case the share price fell (we don’t include dividends as these are never guaranteed; business concerns could always see these cut). Assuming the shares stay static around the current 75p level implies you would still be at breakeven if they fell to 63.75p (last traded July 2013).

What do I need to do?

To participate in this landmark Lloyds share offering and return of the bank to privatization you simply need to open a trading account with Accendo to register your interest and be kept aware of any news on or changes to the deal structure.

It is important that you do this soon, to be in a position to move quickly as the government has a habit of accelerating these transactions to make hay while the sun shines (a June Royal Mail stake sale is a case in point, happening much earlier than anticipated).

What are my options right now?

While there is much excitement about the offer we note that it is being set up to favour those requesting £1,000 or less. This is similar to what we saw for the Royal Mail IPO in October 2013, with most investors limited to stakes of £750. This was designed to encourage share price stability by distributing many small stakes far and wide (limited number of shares, limited gains, less likely to sell quickly). The government’s loyalty bonus for this Lloyds offer is a secondary measure to ensure no quick sales.

If interested in Lloyds shares, it’s probably not just on account of the attractive discount and bonus. It’s probably because you see upside potential for the shares and rising dividends. However, what happens if the shares rally towards broker targets of 100p between now and next spring? Would you like to buy Lloyds shares at 100p, or would you prefer to buy them 25% lower at current levels?

We suggest that any investors looking for immediate and/or more exposure to any potential Lloyds share price rise could consider CFDs as an alternative with a £10,000 position requiring just a 5% deposit (£500).

As the chart on the next page show, the shares offer 40% upside to the most bullish target and a still handsome 23% upside to consensus. Note also that 95% of brokers have targets above the current share price and several are touting 100p or more.

Top see how this looks on a chart, see over;

Lloyds Banking Group – 2.5 year price chart