Finance Minister Mathias Cormann has sold Medibank Private for a higher-than-expected $5.7 billion, but he has left no room for error for the insurer's management team, who must now satisfy demanding investors who have bought in at a lofty valuation.
Medibank shares have been sold to institutional investors at $2.15 each, Mr Cormann said on Sunday.
The opening price, which is higher than the government's initial indicative range of $1.55 to $2.00, is also 7.5 per cent higher than the $2 a share that mum and dad investors have paid. That sweetener will deliver an immediate paper profit when the insurer begins trading at noon on Tuesday, under the ticker code MPL.
However, those investors will also receive allocations that are in many cases far lower than the value of shares they applied for.
Mr Cormann said the government was forced to scale back retail allocations because of the significant demand for shares.
"Scaling of the [retail] offer has been applied on a progressive basis, with applicants for larger parts of the stock being scaled back to a greater extent than applications for smaller parcels," he told a press conference.
"More than half of general public offer, policyholder offer and employee offer applicants will receive at least 80 per cent of their application and more than three-quarters of these applicants will receive more than half of their application."
Retail shareholders have been allocated 60 per cent of the Medibank shares on offer, which is in line with recent privatisations, Mr Cormann said.
Out of the retail stake, 33.2 per cent of those shares will go to eligible Medibank customers, who received preferential allocations if they registered.
Local fund managers received 54 per cent of the institutional allocation, with the balance going to foreign funds.
Argo Investments senior investment officer Christopher Hall, whose fund received a stake, said the price was high.
"It's certainly at the upper end of the pricing band," he said. "It's going to be critical now that management deliver on the strategy to meet the prospectus forecasts and beyond."
At $2.15 a share Medibank is valued at about 23 times its forecast net profit in 2015-16. The price-earnings ratio, which is a measure used to compare how expensive companies are, shows that Medibank will trade at a premium of about 15 per cent to nib. The health insurer, Medibank's only listed peer, is a much smaller organisation but it trades on a forward P/E ratio of 20 times.
Mr Hall said the premium to nib reflects how the market valued Medibank, but added: "It is a very full multiple and there is no room for slippage."
CLSA analyst Jan van der Schalk said the high price would put a lot of pressure on Medibank managing director George Savvides and his team. "My range is $1.55 to $1.64, so according to our calculations it's expensive," he said.
Mr van der Schalk, who is one of only a few independent analysts not linked to the asset sale, said he expected Medibank to reach for easy cost-cutting measures, like reducing procurement spending or cutting staff, to ensure it met earnings targets outlined in its prospectus. Given the high price, investors would be very sensitive to any misses, he said.
"Within six to 12 months at this level of pricing it strikes us that this stock, given its market capacity and potential liquidity, is a real opportunity for short sellers," he said.
When asked at the press conference if the government was just selling an asset that would boost earnings by cutting costs, as opposed to a company in growth mode, Senator Cormann said Medibank was a good business.
"It's the largest private health insurance business in Australia, covering 3.8 million Australians, and so there's lots of opportunity," he said.
"Medibank Private in private ownership will be able to perform better than in public ownership. They will be more flexible in pursuing growth opportunities into the future, they will have better access to capital markets and they will have opportunity obviously to perform and to do the best they can without having the restrictions of government ownership imposed on them."
Mr Cormann said $2.15 a share was the highest price that could be achieved with the institutional offer appropriately well covered.
He would not speculate on whether there would be enough demand left to deliver a lift in the share price on debut.
Australian Ethical portfolio manager Andy Gracey, whose fund received shares, said he expected there would be a little bit of upside from here.
