Business

Royal Mail: Vince Cable defends sale price as shares rise again

  • 18 October 2013
  • From the section Business

Business Secretary Vince Cable has defended the 330p flotation price of Royal Mail on a day when shares in the company briefly touched £5.

Value for money was important, but it was "about more than just the level of proceeds received on day one" of the flotation, he said in a letter to MPs.

Some big investors declined to invest in Royal Mail, while others were uneasy about possible strike action, he added.

The remarks were made to the Department for Business, Innovation and Skills.

In the letter, Mr Cable says the price was set to ensure a successful transaction, good value, the ability to sell off the remaining government stake in the business and it being able to access finance from the markets.

The price range was determined using market testing which involved consulting with a core group of 20 investment institutions. It was also priced relative to comparable companies operating elsewhere in Europe.

He said that the threat of industrial action by the postal workers' union was also a factor that influenced the initial price range.

"There were some investors who stated that they were not willing to invest at all and many others who focused on the business and financial implications of strike action," Mr Cable said.

The letter says it was the banks employed to coordinate the sale - Goldman Sachs and UBS - that recommended the 260p to 330p price range for the shares. This was also endorsed by the government's independent adviser, the investment bank Lazard.

The consultation process with investors, known as "pilot fishing", revealed that there would be sufficient demand for shares at the bottom of the range, even with the threat of industrial action.

A slightly lower upper end for the price range was initially recommended. That was subsequently revised upwards "following ongoing positive feedback", he said.

'Execution risk'

The final 330p float price was agreed based on final demand indications. It was endorsed by Lazard. The investment bank has now been asked to appear before the BIS Select committee amid concerns that Royal Mail was sold off too cheaply.

When it became clear the share offer was many times oversubscribed (20 times for the institutional offer, seven times for the retail offer) the government did consider revising the price upwards.

But this was not done "based on an assessment of the composition of demand... and an assessment of where demand would taper off," Mr Cable writes. There was also a view that this would introduce an "execution risk" to the sell off.

Mr Cable said the banks helping with the sell off "recommended against increasing the price range; this advice was endorsed by Lazard".

The letter does not address why the current price of Royal Mail has gone so high. But its understood the government believes this is down to the scarcity of shares available.

It also believes hedge funds - some from the US - may be buying at this elevated price in the belief that Royal Mail may be transformed and modernised quicker than anticipated.

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