Was Royal Mail sold too cheaply?

 
Royal Mail van

With £27bn of investors' money having chased shares priced at just £1.7bn, and with Royal Mail's share price trading at more than 450p this morning, compared with the 330p a share the government is receiving, there is a certainly a case for saying the government could have got more.

And just to put this in slightly more concrete terms, at 330p the government is receiving a fraction under £2bn, if (as is very likely) its bankers exercise what is known as the over-allotment option (if you really want to know more about this, see me after class).

However if the shares had been priced at around this morning's market price, at say 450p, the Exchequer would have received £2.7bn.

So should taxpayers be raging that they've lost a potential windfall of £700m, which would not have paid off the trillion pound national debt but would have paid for a couple of miles of High Speed 2?

There are a number of things to say about this. And the first is that pricing is more art than science, and no vendor of a large number of shares will ever get the best price available.

Also the price range for the privatisation shares was set by the government at a time when prevailing opinion was that this was a risky declining business hobbled by lamentable industrial relations; it was only in the course of the share sale that investors noticed a parcels operation growing very nicely, an endowment of potentially valuable properties in city centres and the fat income the company is promising to pay shareholders.

What is particularly striking is that Royal Mail's own people are confident that they are in a business that will prosper: I have learned that 15,000 Royal Mail employees, almost a tenth of the workforce, have paid £52m to buy Royal Mail shares (in addition to the free shares being handed to all Royal Mail employees).

However, what some may think is odd - including, presumably, ministers - is that investors have completely ignored the risk that Royal Mail could imminently be brought to a grinding halt by a strike. The frenzy to buy Royal Mail shares probably tells you quite a lot about the extent to which better-off people think the economy is recovering - which the government is not going to rage about.

That said, a 36% gap between market price and privatisation price is far wider than would normally be thought necessary to whet punters' appetite for future privatisations (remember that the Department for Business Innovation and Skills has another 30% of Royal Mail to flog, probably next summer, so ministers would not want to burn investors buying in this initial share offer).

So something does seem to have gone a bit cock-eyed with the sale. What?

Well the privatisation prospectus explicitly allowed the government to revise the sale price up, outside of the indicated range, if demand for the shares turned out to be much greater than expected. With big investment institutions putting up money for the shares worth 20 times what was on offer to them, and retail investors bidding for seven times what was available, it is fair to say demand was greater than anticipated.

So why did the relevant ministers, Vince Cable and Michael Fallon, sell at the top of the indicated range, rather than breaking through that threshold?

They had what they regard as non-partisan advice, from the investment bank Lazards - which was not involved in actually placing the shares, and therefore had no vested interest, in theory - that 330p was a fair price.

And that advice was apparently underwritten by the government's own internal counsellor on these issues, the UK Shareholder Executive.

But, that said, Cable and Fallon are grown-ups and know that ultimately the buck stops with them: advisers advise, ministers decide.

So they know that if the share price stays at this level for weeks and months, they will be vulnerable to criticism - and, probably, to a ticking off by the National Audit Office.

But Vince Cable has already made clear that he thinks the market is wrong to price the shares at these levels, by talking about the need to wait until the "froth" has been blown off.

Or to put it another way, he and Fallon assume that Royal Mail shares will be back near the offer price before Christmas.

Which points towards the most delicious political spat I've seen in a long time.

Labour's spokesman on all this, Chuka Umunna, in chastising Cable and Fallon for allegedly selling Royal Mail too cheaply, has in effect been shouting - at the most sensitive period of privatisation - "the government is selling five pound notes for 50p, fill your boots."

Whereas the capitalist Tory Fallon and leftish Lib Dem Cable have been saying to retail investors, "I'd take care if I were you, this stock-market game can be a bit dangerous."

So what is quite striking is that 700,000 people with a bit of money to spare voted Umunna, by stampeding to apply for the shares - though whether they are natural Labour supporters is another thing altogether.

Here is the intriguing political calculation.

If Royal Mail shares stay at these levels, the government may well in time be found guilty of having privatised the company too cheaply.

But ministers have just delivered a tidy windfall of £187m to 690,000 people who've been allocated £750 of shares each. That is a potential profit of almost £250 for each of them.

Which is a fair number of people who are probably prepared to buy Fallon and Cable a drink.

 
Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    +1

    Comment number 245.

    I'm going to sell my 10 quid note. I'm looking to get a price between 4 and 6 pounds. Hopefully the sale will be successful...

  • rate this
    0

    Comment number 244.

    What has happened £330

  • rate this
    0

    Comment number 243.

    How the market works.
    The share price rise is not a reflection of under valuing the Royal Mail, merely the demand for a safe investment.
    Any government privatisation leads to buying on the first day which inflates the price due to a lack of sellers at the flotation price.
    Next week should see a fall in the price as new buyers at the current price dry up and those seeking a quick profit sell.

  • rate this
    0

    Comment number 242.

    As we know nearly 700,000 small investors saw their £749 stakes increase by about £280 as the original 330p price closed up more than a third at 455p.
    For me Christmas has come early for Cameron and his crew. This is only going to boost the economy in the short term however what goes up must come down. When Miliband and his mates are elected in 2015 the prices will fall meaning economy falters.

  • rate this
    0

    Comment number 241.

    It doesn't matter.
    This is simply dogma politics.
    It will not make an ioata of difference to the economic crisis we are all living through.
    The government is more interested in propping up the market and house prices, rather than the far more important issue of inflation and the value of the UK pound against other curriencies.

    Q.E. and bail outs approaching £500B. puts it into perspective.

  • rate this
    0

    Comment number 240.

    The Royal Mail has a virtual monopoly of `final mile' domestic delivery. This gives it immense marketing power. It could be a great business.

    Once it was a great business with enormous potential until the last government bonused the management to rip out the value and sell off the best bits to third parties.

    We did not need to end up here, but now we have let's make the best of it.

  • rate this
    0

    Comment number 239.

    @234 LOM
    Agree on those industry sectors, there is taxpayer subsidy {another scandal} but only according to EU rules. I think if you check carefully, you will find this part privatisation was not only hurried thru' as a cash raiser/pre-Elec bribe but also because it was being called for by EU market regulation.

    Other EU nations have privatised or are privatising their mail services.

  • rate this
    0

    Comment number 238.

    I bet Deutsche Post is looking every closely at this.

  • rate this
    -1

    Comment number 237.

    Funnily enough, the day of the sale we had no postal delivery at all...

  • rate this
    +2

    Comment number 236.

    the sale of the royal mail was not to boost government funds it was seen as an opportunity to sell it of to their mates, using the economy as a smoke screen. they new its real value, due to the projected online sales and the projected rise in mail deliveries over the next 10 years. you have duly been ripped of. sit down and think about it. who really gains from this sale. then you see the truth.

  • rate this
    +1

    Comment number 235.

    i bet within a year they will be trading at £7.00 a share. sold cheap to line their wealthy mates pockets, and to entice the small investor to sell them quickly so the wealthy tory friends can increase their share of the royal mail till they own 90%. also it should not be called the royal mail any more. its now a private company, not a state company.

  • rate this
    +1

    Comment number 234.

    233.Up2snuff - ".......Against EU rules, I think............"



    Pathetic - I pointed you to the EVIDENCE....


    ...who is paying for BT to roll out super fast broadband? The Tax Payer, not the phone companies.....


    ....who is paying MORE money into the rail system now than before privatisation......us, the tax payer.....

  • rate this
    -1

    Comment number 233.

    230.Little_Old_Me
    C/. HIGHER public subsidy....
    ~
    Against EU rules, I think. More likely Govt will have to regulate prices for all carriers. Level playing field and all that.

    However, I'm sure that some clever Minister could & will see RM as part of 'Climate Change' and will arrange a special tarriff .....

  • rate this
    0

    Comment number 232.

    221J_f_H
    As you know well my point is/was that if the civil servancy was competent then they could run an organisation as well on average as any other owner.
    ~
    In my experience, RM worked really well & is (was?) a brilliant service. Actually I was winding you up there, as RM is not really run by C.S. but independently by rather too many (IIRC) boards comprising too many directors.

  • rate this
    +1

    Comment number 231.

    223.splendidhashbrowns
    Seems to me that Mr Osborne is behind this sell off to raise a bit more money before his Budget speech in December
    ~

    GO's Benefits bill is about to climb by up to 8% thanks to the energy cos., so he needs to either increase the top rate of IT or sell an asset.

  • rate this
    +1

    Comment number 230.

    Using as an evidence base what happened after BT, the water boards, electricity boards, British Gas & BR I predict the we will soon see i the postal indsutry:



    A/. Higher prices....


    B/. Worse service....


    C/. HIGHER public subsidy....

  • rate this
    -1

    Comment number 229.

    Priced cheap it may have been but 10's of thousands are sitting on a £250 profit which will soon be cashed in & spent on the high street...mine will! Plus those who have a pension will have a few extra quid in the pot via the institutionals. Finally, it's about time a middle earning, single, no kids, healthy male got something for all the tax he pays!!! Latas x

  • rate this
    +1

    Comment number 228.

    This sell off only happened because the boy Gideon, our work experience Chancellor, needs to cover the holes in Goverment finances, what with his economic "policy" not working...


    ...this year it's been RM & 4G...


    ...what will he sell off in 2014 or 2015 to further cover the holes in his books - sell state owned assests is the sum total of Tory policy, always has been, always will be...

  • rate this
    0

    Comment number 227.

    225.kmckenna
    as an addendum, you all should have bought £750 of shares online in our postal service. The profit from your share sale would offset your increased cost of use of the service in the future.
    ~
    You have a point but as mail costs form part of the cost of living if, as expected, they get out of hand Govt will have to step in - again - to 'regulate'.

  • rate this
    +1

    Comment number 226.

    Whilst I,m on the the subject, why not change the pejorative title of our postal service to something more inclusive like the pepublican mail, or RM for short. As an aside, Thatcher ( who won an election on the slogan " great britain not state britain" ), was opposed to an RM sell off. She would be heartbroken only for she was heartless.

 

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