Royal Mail sold off too cheaply says National Audit Office. Institutions favoured over small shareholders prove to be short term sellers

1st April 2014

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Royal Mail shares were sold off more cheaply than necessary a report from the National Audit Office has found. The report found it was a mistake to reduce the Government stake to 30 per cent missing out on subsequent stellar returns.

The NAO has also suggested that Vince Cable, the Business Secretary adopted a cautious approach that led to shares being priced “substantially below” the initial trading price.

Shares closed at 38 per cent higher than their initial trading price – an increase of £750 million. Critics have compared the sell off to a previous sale of gold bullion by Gordon Brown.

Auditor-general Amyas Morse, head of the NAO said: “The Department [of Business, Innovation and Skills] was very keen to achieve its objective of selling Royal Mail, and was successful in getting the company listed on the FTSE 100. Its approach, however, was marked by deep caution, the price of which was borne by the taxpayer.

“The Government retained 30% of the company. It could have retained even more and allowed the taxpayer to participate further in the rapidly increasing share price and thus limit the cost to the taxpayer.”

The report says that the Government could have retained 110 million more shares, worth £363 million, at the offer price, while still privatising the business.

The report notes that 12 of the institutional investors which were given priority to buy shares sold them off within the first few weeks of trading.

Six of the institutional investors sold all their shares within weeks of trading, while a further six sold part of their holdings while four others increased their holdings.

The 16 priority investors were allocated £728 million worth of shares.

Three surplus properties with a market value of more than £200 million were disclosed in the privatisation prospectus, but the NAO said this value was not recovered.

The NAO says the Government should have examined alternative methods of accessing equity markets and reducing reliance on professional advisers, which the report said cost £12.7 million in the Royal Mail sale.

However ministers have defended the sale. Business secretary Vince Cable said: “We secured the future of the universal postal service through a successful sale of a majority stake in Royal Mail, predominantly to responsible long term investors.

“Achieving the highest price possible at any cost and whatever the risk was never the aim of the sale. The report concludes there was a real risk of a failed sale attached to pushing the price too high, and a failed sale would have been the worst outcome for tax payers and jeopardised the operation of Royal Mail going forward.”

The report has been seized upon by the shadow business secretary Chuka Umunna, who said the report was a “damning verdict on the sales.

He added: “We now know definitively that far better value for taxpayers could have been possible had ministers adopted a different timetable for the sale. The NAO could not be clearer: the inflexible timetable set by ministers for Royal Mail’s privatisation resulted in the public losing out.

The NAO says that the Government accepted a system that gave certainty that the transaction would be completed, by setting a cautious low end of the price range (260 pence). This allowed the Department’s to complete a sale within the time available, offsetting the risks of industrial action and short-term market uncertainty. It also reflected the price indications of a small number of priority investors whose participation was seen as vital, as well the views of over 500 other potential investors.

The NAO notes that the banking syndicate used a ‘book-building’ process (to generate demand for shares and determine the price in the market for shares). Demand for shares was 24 times the maximum number available to institutional investors but the Department encountered the inherent limitations of the book building process which meant it did not know how much demand for shares existed at prices above the high end of the range set by the Department (330 pence).  The Department was advised that the book building had not revealed sufficient demand at meaningfully higher prices and therefore judged that the risks and practical difficulties of raising the price were too great.

A small number of priority investors were allocated a larger proportion of their orders than other investors to reflect the Department’s expectation that the priority investors would form part of a stable, long-term and supportive shareholder base. However, almost half of the shares allocated to them had been sold at a substantial profit within a few weeks of the stock market launch.

Communication Workers Union general secretary Billy Hayes said: “There are so many aspects to Royal Mail privatisation highlighted in this report that had appalling results. This further supports the view that the Government was desperate to get rid of Royal Mail because it fitted with their agenda. The sell-off was never about getting the best deal for taxpayers.

“The report reinforces that this was a fire-sale package created for political purposes which is simply not good enough and continues to put the future of Royal Mail at risk.”

The report is not entirely critical. It also says: “The report recognizes that, following substantial intervention by the Department, Royal Mail is now a profitable commercial business with access to private capital and intends to reward its shareholders with dividends. It is now less likely that the taxpayer will have to provide public support for the universal postal service.”

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