Sweeteners offered to make sale success

The Government yesterday displayed its determination to make the Railtrack sale a success in the face of threats from the Labour Party to toughen controls on the company. A pounds 69m additional dividend, to be paid in October out of profits made while Railtrack was state owned, is one of a number of sweeteners designed to make the privatisation more attractive.

City analysts said the Government has structured the pounds 1.8bn sale to give returns in the first year, both from dividends and discounts, above those seen in most previous privatisations, and four or five times as high as a building society. This does not mean an investment in Railtrack is as safe as building society, because the value of the shares can go up or down. But the high initial returns could underpin the value of the shares in the stock market.

The signs so far are that the marketing drive is having an impact. SBC Warburg, the investment bank handling the sale, said 910,000 potential investors had registered by last Thursday with share shops run by 110 banks, building societies and other financial companies involved in the sale. Only those registered get special discounts and bonus shares.

The number includes 140,000 private clients automatically registered by the share shops, but even so is well above the level expected in the early stages of the marketing campaign. As an incentive to hurry and register, the Government said the lists would be closed soon but did not say when. Other sweeteners, apart from the pounds 69m dividend, include a discount for private investors. They are thought likely to pay about 5 per cent less than City institutions.

In addition, there will be a 15p a share discount - up to a maximum of pounds 120 - on the second instalment payment on the shares, which is due in June 1997. Instead of the second discount, buyers will be able to choose one free share for every 15 they hold up to a maximum of 1,200 shares.

The preliminary or "path- finder" prospectus for the sale, published yesterday, makes clear there is unlikely to be the huge property development bonanza once claimed by the Labour Party, which has promised to change the rules to clawback some of the money.

The prospectus says Railtrack's property income for the six years to 31 March 2001 is expected to be pounds 1,000m, of which about pounds 250m is from sales of property. The rest is from rent.

Under an agreement with John Swift, the rail regulator, Railtrack keeps 75 per cent of any excess profits it makes on property, with the rest going to the train operating companies.

However, the prospectus makes clear that the pounds 1bn property proceeds have already been accounted for in setting the level of track access charges paid by train operators. The sharing 75 per cent mechanism only comes into operation if there are additional profits such as a windfall from developing sites owned by Railtrack.

The bulk of Railtrack's property is an intrinsic part of the railway operations and - according to estimates by Hiller, Parker May & Rowden, the chartered surveyors - other property owned by the company has a total value of pounds 230m. This ranges from a stake in the Broadgate office development in the City of London to the Central Hotel in Glasgow.

Clare Short, Labour's transport spokeswoman, said: "A worry to investors will be the value put on Railtrack's property portfolio; pounds 230m will not provide the bumper development potential many had hoped for. Labour will channel all proceeds from property development back into infrastructure."

However, the absence of large property gains takes the sting out of Labour's threat to change the sharing arrangement for property profits. City analysts said it meant Labour's promised changes would have less of an effect on the value of the company to shareholders.

Labour has also promised much tougher regulation of Railtrack, but the City does not appear to have been deterred because the threat was accompanied by a promise not to cancel existing contracts against the wishes of the parties to them.