Standard Life is set to price next week's market debut at the low end of its price range and at a discount to the UK insurance sector, even as markets claw back recent losses, investors and analysts said.
Europe's largest customer-owned insurer will next Monday end eight decades as a mutual and take a key step in its turnaround plan when it lists on the London Stock Exchange in the biggest UK initial public offering since Dimension Data in 2000.
Fund managers and analysts said they expected the initial offer price - which could be set as early as Friday - to be between 210 and 230 pence, valuing Standard Life at up to almost 4.7 billion pounds.
That would be at the bottom end of its June price range of 210-270 pence, which would have valued it at up to 5.25 billion pounds.
For a company that still has to prove that it can deliver going forward, a discount is probably what the market wants, fund manager Guy de Blonay at New Star said.
You've got takeover potential, you have a management that is pretty eager to prove the market wrong and deliver. With a reduced price we'll very much have the opportunity to buy into a new name after two months of difficult markets.
Grey market prices, which reflect the estimated value of a stock after the first day of trade, were seen at 232-240 pence at bookmaker IG Index and 235-240 pence at Cantor Index.
Around (210-215 pence) would be plenty. If investment banks decide to issue it at 240-250 pence, it won't have the same success, David Buik at Cantor Index said.
At the lower end of last month's range - already trimmed back from an April trading range of 240-290 pence on market volatility - Standard Life will trade at a discount to its embedded value (EV), an industry measure that values how much a life insurer is worth to its shareholders.
The overall sector trades at a premium. Among its closest peers, former mutual Friends Provident is trading at 1.2-1.4 times EV while Legal & General, which shares its UK focus, trades at around 1.1-1.15 times EV.
TAKEOVER TARGET -OR NOT?
Standard Life, battered during the stock market bear years because of its exposure to equities, was forced to turn its back on decades of mutual ownership in 2004 to meet tough new capital requirements.
Since then, it has reported a profit for 2005 as it responds to declining demand for its once-core with-profits products by slashing commissions and changing its focus to more lucrative business, including self-invested personal pensions (SIPP).
Analysts have raised concerns competitive pressures could increase as rivals move in and the boom in pension demand eases.
But trading below EV could make Standard Life interesting to potential suitors and may set a stop-loss for its shares, though analysts said they would be surprised to see a late bid.
Standard Life remains a pension company, and it is difficult to find significant UK players that are particularly enthusiastic about pensions, analyst Bruno Paulson of Sanford Bernstein said in a note. Paulson has a fair value of 260 pence for the stock, with an expected IPO price of 235 pence.
The possibility of a takeover does remain as a back-stop, if the grand plans for SIPPs and the like fail to come off.
Standard Life said earlier this year it had received a number of approaches, which its board had rejected.
If anybody was interested in Standard Life, you would have thought they would have done it before the float, fund manager Colin Morton at Rensburg Fund Management said.
In the life insurance sector, despite all the potential and bid rumours, the reality is there hasn't been any activity among UK majors for a couple of years.
Morton added he expected Standard Life to see a slight lift after the debut, as reflected in grey market prices.
I'd be surprised if it starts trading on day one at a substantial premium, he said.