Britain’s new capitalists

ROSS LAVER December 1 1986

Britain’s new capitalists

ROSS LAVER December 1 1986

Britain’s new capitalists


Like most of her compatriots, British accountant Joan Loy had never invested in the stock market. But last year the 34-year-old Londoner saw a newspaper advertisement for shares in Britoil PLC, a state-owned energy firm that Prime Minister Margaret Thatcher’s Conservative government was selling to private interests, mainly small investors. Loy decided to put $1,200 into the company because, she recalled, “I was hoping to make a killing.” In fact, the value of her shares has fallen by 10 per cent since last year. But the experience sparked her interest in the stock market, and two months ago Loy applied for 1,500 new shares in TSB Group PLC, a British savings bank. When she then sold them on the day of issue, she pocketed a profit of $2,000. And in December, she plans to invest up to $15,000 in British Gas PLC, another state-owned firm being sold to private investors. Said Loy: “Trading shares is like gambling. It’s exciting—and once you get started, you’re addicted.”

Loy is typical of the record numbers of Britons who are putting money into stocks, in large part because of the government’s privatization program, combined with tax breaks for small investors. A London-based financial consulting firm, Dewe Rogerson Ltd., calculated recently that since Thatcher won her second term in office in 1983, the number of Britons who own shares in publicly traded companies has soared to seven million from two million, or about 17 per cent of the adult population. Thatcher’s government has transferred eight major state-owned companies worth a total of $15 billion to the private sector. The prime minister calls the policy “popular capitalism.” And her goal, experts say, is to break down the traditional animosity between workers and management in Britain by giving ordinary people a stake in private industry.

The privatized companies include Amersham International PLC, a chemicals manufacturer; British Aerospace PLC; and Cable and Wireless PLC, a telecommunications company. For the most part, small investors showed little interest in those firms, and the shares were sold mainly to professionals and institutional investors. Then in

July, 1984, British-based luxury car maker Jaguar PLC began mailing prospectuses to every Jaguar owner. The response was so great that brokers had to hold a lottery to decide which of the

small investors who had applied would get the shares.

A few months later the government launched an even more ambitious program to promote shares in British Telecommunications PLC, the national telephone company. Brochures on how to buy stock were sent to every telephone user in the country. In addition, small investors were offered bonuses of free shares or vouchers entitling them to discounts on their telephone bills. When 2.1 million people took up the offer, the government imposed a limit of 800 on the number of shares allocated to any one investor, in that way ensuring that those who had applied for a relatively small number

of shares got exactly what they asked for, while large investors got fewer. “In effect,” said Roger Nightingale, an economist at Hoare Govett Ltd. in London, “the government blatantly

discriminated in favor of the small guy.”

Now, a high level of public interest in the British Gas offer is a strong indication that Thatcher’s campaign to turn Britain into a nation of small shareholders is succeeding. The sale of the utility, which analysts say is worth an estimated $12 billion, will be Britain’s largest-ever privatization and one of the largest public offerings on any stock market in the world. Four billion shares go on sale this week, starting on Nov. 25, priced at no more than $3 each. “In the old days, stock trading s was confined to a small elite in this country,” said Ian Steers, vice15 chairman in London of

Wood Gundy Inc., a Toronto-based investment dealer that is the lead underwriter for the Canadian portion of the issue. “Now, even taxi drivers and hairdressers are talking about buying into British Gas.”

Another part of the government’s strategy has been to encourage companies to offer stock to their own employees. In British Telecom’s case, 96 per cent of the workforce, or 222,000 people, chose to become shareholders against the advice of their own union. And since 1979 the number of British firms that distribute stock to their employees as part of company profit-

sharing programs has increased to 1,063 from 30, according to the London Stock Exchange (LSE). The government’s next move, said Nigel Lawson, chancellor of the exchequer, will be to introduce so-called personal equity plans, which will give tax breaks to people who invest up to $4,800 a year in equities.

For Thatcher, the spread of share ownership is helping to create what she calls a “free enterprise, entrepreneurial culture” in a country that for decades has leaned toward state control of industry. “The prime minister is a firm believer in the benefits of capitalism,” said Madsen Pirie, president of the Adam Smith Institute, a conservative think tank, “and she has embarked on a mission to spread that zeal to others. She wants to show that when industry is profitable it helps everyone in society.” Added Peter Hutton, a director of Market & Opinion Research International, a London-based polling firm: “To some extent, the increase in the number of

unionized workers who have shares in their own companies is undermining the old view that capitalism is a bad thing.”

But clearly Thatcher also expects that her campaign to encourage share ownership will pay dividends at the next election. Tory strategists say that voters will likely be reluctant to vote for Labour leader Neil Kinnock if they believe that a government led by him would renationalize British Telecom, British Gas and other firms in which they hold stock. Said economist Nightingale: “If the government just wanted to make money by selling off state as-

sets, it could do it any number of ways. But it is deliberately trying to involve as many voters as possible. This is a Trojan Horse to try to prevent the socialists from winning the next election.”

The widespread interest in the British Gas flotation is partly the result of a massive advertising campaign. Last summer British television viewers were bombarded with ads explaining what the firm does—the utility supplies natural gas to 16.8 million homes and businesses—and extolling its virtues as an innovative energy corporation. Then, on Sept. 1, the campaign switched to a series of governmentfunded commercials featuring postmen, housewives, farmers and other ordinary Britons discussing how and when to buy British Gas shares. Similar ads have run in magazines, newspapers and on billboards around the country.

Encouraged by Britain’s example, several other European countries are also promoting the idea of share own-

ership. In France, the new conservative government of Prime Minister Jacques Chirac has proposed selling off $50 billion worth of state-owned companies over the next five years. To get people into the habit of buying equity, the government plans to give employees of privatized companies the right to buy up to 10 per cent of the shares at a discount.

Still, critics of Thatcher’s popular capitalism include former Conservative prime minister Harold Macmillan, who has accused the Tories of “selling the family silver” by transferring state assets to the private sector. And

Bryan Gould, a Labour spokesman on trade and industry, said that the Tor ies' real motivation is to boost gov ernment revenues and increase the earnings of stockbrokers in the City, London's financial district.

Despite such complaints, the government is planning to issue shares in several other state-owned companies including British Airways, Rolls-Royce Ltd. and the British Airports Authority. And if the trend continues, small investors will buy a piece of those companies, too. But some analysts say that many new investors are in for a shock when the current bullishness on the LSE ends. And when stock prices begin to fall, many individual shareholders may decide to bail out. Said pollster Hutton: “If a lot of people get their fingers burnt, it is certain to dampen the enthusiasm for owning shares.” And in a falling market, Thatcher’s “popular capitalism” could quickly become a political liability.

ROSS LAVER in London