Thatcher's legacy

The era of privatisations she ushered in was ostensibly designed to promote share ownership to the average man on the street - famously personified by the British Gas privatisation advertising campaign, and the call to action: "If you see Sid, tell him". And until Black Monday came along as a sharp reminder that share ownership was not a one-way bet, it was a plan that seemed to work - in the pre-internet days, each privatisation was marked with huge queues of would-be investors looking to get a slice of the action. Stockbroking services began to spring up everywhere, including unlikely places such as Debenhams department stores where, according to Paul Killik of Killik and Co, who pioneered the march of retail investors, newly anointed share aficionados would loiter to keep an eye on live market prices - at the time the only place beyond the professional exchanges that they could be obtained.

The reality, though, proved somewhat more controversial. Black Monday aside, Thatcher was accused by many of "selling the family silver", most famously by former prime minister Harold Macmillan. He and others were concerned that privatising industries crucial to the day-to-day functioning of the country - energy, telecom and transportation in particular - could leave the nation's well-being at the mercy of commercial interests. The Labour Party promised that should they triumph in the 1987 general election, they would have reversed the process.

Thatcher, on the other hand, argued that these companies would be run more efficiently under private ownership than they had been in the state's hands, which would mean both customers and shareholders would benefit. "We want a society where people are free to make choices, to make mistakes, to be generous and compassionate. This is what we mean by a moral society; not a society where the state is responsible for everything, and no one is responsible for the state," she said.

It was a political philosophy that dovetailed neatly with the fact that Thatcher also needed the money. By 1990 there were 42 major businesses employing almost 900,000 people that had been sold off under Mrs Thatcher's government's regime, and between 1979 and 1998 the government raised a total of £70,138bn from the shrinking state-owned sector. It seemed that nothing was considered to be sacred and if it moved it was sold. And it worked for Thatcher's government - as Gerard Lane at broker Shore Capital notes, between 1984 and 1994 privatisation proceeds helped to reduce the annual borrowing of the government by an average of 1 per cent of GDP each year.

The current government's need to balance its own books is about to prompt another spate of privatisations - among these will be the sale of the government's crisis stakes in RBS and Lloyds and, as we have discussed at length in this week's cover feature, the Royal Mail. And even if, as Mr Lane believes, the privatisations will not go far enough to help the UK avoid its fiscal reality - as those of the 1980s and the exploitation of North Sea oil did - it does present a potential opportunity to private investors.

But should they invest? Hopefully our cover feature should help prepare Sid et al for the decision they will be faced with in the coming months. But as an additional guide, it's worth looking back at the privatisations that sparked the public interest in stocks and shares a quarter of a century ago.

British Gas - the privatisation that lit a flame under shareholder returns

A ubiquitous and unforgettable advertising campaign urged the general public to buy shares in British Gas in 1986, encouraging everyone: "If you see Sid, tell him about it". Well, 1.5m people, including Sid, were hooked and bought shares at 135p each. There were 425.5m shares in total up for grabs (97 per cent of the company) and the sale created millions of first-time shareholders and kick-started a new-found interest in the stock market.

Many people took up the opportunity to purchase the shares in order to make a quick buck for themselves by selling the newly gained investment in the market once the shares started trading. Lots more, however, simply held onto them - and these people did rather better. If you'd bought the shares in 1986 and held on to them until now you would have a mini portfolio comprising of not one but three energy related companies. In 1997, British Gas was split into two - Centrica, the retail arm, and BG the exploration side of the business. It didn't stop there - soon after, in 2000, BG spun off its gas pipeline operation Lattice, which subsequently merged with National Grid to form National Grid Transco two years later before reverting to its old title of National Grid again.

That means that if you had bought 100 shares at a price of 135p a share your initial outlay could have increased by 1,149 per cent. And if you had reinvested the income received your outlay would have increased by over 5,000 per cent. So if you told Sid he owes you one.

■ IC VIEW: Centrica (CNA: 381p) may be better known for its domestic energy business, the bulk of which still trades as British Gas, but we think its upstream business is a key part of the shares' attraction. After splitting from its exploration and production arm, BG, it's been quietly building up a portfolio of assets spread across the North Sea, Norway, Netherlands and Trinidad, and recently signed a £160m deal to exploit shale gas in the UK. Securing gas supplies is all the more crucial after it walked away from plans to build four new nuclear reactors in partnership with EDF, instead returning £500m to shareholders. Such chunky cash returns is one reason we still rate the shares a buy. As for BG (BG.: 1,227p), With few share price catalysts in the offing prior to an expected production surge later this year, and a marked pull-back in capital expenditure in the offing, investors in BG will be hoping that management will start returning a higher proportion of cash to shareholders. While BG's commitment to early-stage projects such as its development of a gas liquefaction facility in Tanzania cannot yet be fully quantified, the group should start generating positive free cash flow in 2015, paving the way for increased returns. On balance, the shares are a hold.

Thatcher's privatisation programme

British Airways - still struggling to gain altitude

British Airways (BA) was privatised in February 1987 in a hugely oversubscribed flotation. Over 1m applications were received for its shares, offered at 125p, making the offer 11 times oversubscribed. But it has been a turbulent flight ever since for 'The World's Favourite Airline' (the slogan it used at the time of flotation).

Original shareholders had at least two clear opportunities to sell their investment and make a healthy profit - in 1996 and again in 2006. But those that have continued to hold onto the shares for the duration won't have done so well. Airlines have often proved moneypits for shareholders - flying people around is an expensive business fraught with pitfalls - and BA hasn't bucked the trend.

The troubled economics of the air travel industry - including rising oil prices, the advent of no-frills airlines, and the difficulties former nationalised flag carriers have had with heavily unionised workforces - has prompted much consolidation over the years, and BA has proved no exception. In 2011 BA merged with the Spanish airline Iberia, Líneas Aéreas de Españia, SA to become International Airlines Group (IAG). Shareholders were promised that they would benefit from the merger of airline operators British Airways and Iberia but that is looking a hollow argument right now. Investors have lost half their wealth since shares in IAG began trading in January 2011.

■ IC VIEW: International Consolidated Airlines' (IAG: 287p) attempt to consolidate the inefficient airline industry did not start well. Deciding to team up British Airways with Spanish basket case Iberia looks to have been a massive mistake. Even chief executive Willie Walsh has admitted he'd turn the clock back if he could and warned there's still a risk that the struggling airline could "disappear". Up to now, its losses have offset profits at BA, but an ambitious turnaround there is finally yielding results and the acquisition of both BMI and Spanish low-cost airline Vueling look much better business. Modernising its ageing fleet will cut fuel costs, too. Hold.

Rolls-Royce - the shares are flying higher than ever after a difficult launch

Rolls-Royce (RR.) split its motor car and aerospace and marine divisions in 1971 and then the aerospace/marine engine division was brought to the stock market in 1987 under a cloud of controversy - not least a raft of anti-privatisation campaigns launched against the float by the unions representing its workforce.

There was less razzmatazz attached to this float than was seen by some of the more 'glamour flotations' of the period, but it was still extensively marketed to private investors. Despite the fact that its budget was relatively low compared with the British Gas float, the offer attracted over 2m share applications and was oversubscribed by a factor of 10.

Initially, the share price dropped and it would have been difficult for investors to make money over the short term. Yet those investors who held their nerve by clinging on to their shares must be delighted by the surge in 2002 until now. Under the leadership of Sir John Rose - who took the pilot's seat in 1996 - the company made huge market share gains in the jet engine market, formerly dominated by GE and Pratt & Whitney. The development of a lucrative aftercare business has been key to the group's recent financial success.

■ IC VIEW: We tipped Rolls-Royce's (RR.: 1,187p) shares more than two years ago and have never wavered in our commitment to one of Britain's finest examples of engineering talent. And we have been rewarded. Rolls is powering the new generation of lightweight, fuel-saving planes introduced by both Boeing and Airbus in recent years and its shares have doubled. And there's good reason to believe the good times will continue. Boeing reckons more than 35,000 new planes will be needed over the next 20 years, doubling the world fleet. There's been little impact from sequestration and management is committed to improving margin and cash generation. A strong dollar is the icing on the cake. Buy.

British Petroleum or BP - spills and thrills for shareholders of this oil giant

This is the float that very nearly sank - and not just as a result of the Deepwater Horizon explosion in 2010, a quarter of a century after BP's flotation. The BP privatisation offering was priced before the stock market took a nose dive and the price that had been set meant the shares suddenly looked very expensive in relation to the market. It was a good job the issue had been underwritten, because the offer didn't get taken up in full by the market.

The sale process was also marked by an attempt by the Kuwait Investment Authority, the investment arm of the Kuwait government, to acquire control of the company. This was ultimately blocked by the strong opposition of the British government. In 1987, British Petroleum negotiated the acquisition of Britoil and the remaining publicly-traded shares of Standard Oil of Ohio, while the government sold its remaining 36 per cent holding in the company in the same year - an offer that proved more successful than the first attempted sale.

The share price chart for BP is best described as a rollercoaster ride since then. Shareholders who took up the offer to buy BP's shares were definitely in for a choppy journey, although there were ample opportunities available to cash in your shares at a profit along the way - any early holders who sold in 1999 or 2005 would have made over 400 per cent.

■ IC VIEW: Prospects for BP (BP.:473p) under its new arrangements with Russia's Rosneft, or the impact of new projects coming on-stream in Australia and Angola, are still overshadowed by the impact of the Gulf of Mexico spill. BP originally decided that its main hope of restricting - or at least clarifying - the extent of its third-party obligations linked to the disaster, was to avoid court proceedings as far as possible, in favour of a general settlement agreement. However, the subsequent level of the settlements is likely to be at least double the original $7.8bn (£5.1bn) estimate, so the group has unsuccessfully resorted to the courts to put a freeze on the outstanding compensation payments. Essentially, the group remains in limbo ahead of a crucial decision by US District Judge Carl Barbier whether the group acted with 'gross negligence' under the US Clean Water Act, which is why the shares are no better than a hold.

How investors would have fared