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Royal Mail pricing is right, says Vince Cable

image captionLabour says the business is "undervalued", but Vince Cable says the price is the right one

Labour's Chuka Umunna is wrong to say Royal Mail is being sold too cheaply, Business Secretary Vince Cable says.

In a letter to the shadow business secretary, Mr Cable says the price was set after "extensive consultation" with investors.

His letter follows criticism that the sale price undervalues the business by up to £1bn.

Mr Cable warns the criticism is "irresponsible" as it may imply an "easy bargain" is to be had.

Earlier on Monday Mr Umunna told the BBC City investors and hedge funds would be the biggest beneficiaries of the share offering and that the sale was "short changing" taxpayers.

He said stockbroker Panmure Gordon, which valued the business at £4.5bn, well above the government's top end price band of £3.3bn, was only one voice.

In his letter, Mr Cable dismisses in detail many of Mr Umunna's criticisms and says that the price reflects the fact the business brings risks, as well as assets such as property.

He says: "It is irresponsible to imply that a share offering looks significantly undervalued.

"I think you should consider the risk that you may be influencing the decisions of retail investors. Equity investment always involves risk, particularly when the company in question is new to the market. In the light of this it is dangerous to imply that there is an easy bargain to be made."

Strong demand

Demand for the shares has been strong.

On Friday, it was reported it was outstripping supply and they were to be sold at the top end of the government's suggested price range.

BBC business editor Robert Peston said applications for the shares were a "few times" the value of those on offer.

Stockbroker Hargreaves Lansdown, one of the brokers through which investors can buy shares, said it would stay open until midnight on Tuesday to cope with the expected high demand.

Members of the public can apply for the shares online until 8 October.

Shares will begin trading in full on 15 October.

Up to 62% of the business will be sold, with the rest remaining state-owned.

Under the terms of the share sale, a 10% stake in the business has been reserved for Royal Mail employees.

'Out of reach'

There is a £750 minimum amount for members of the public wishing to purchase Royal Mail shares, with the threshold falling to £500 for Royal Mail employees.

media captionChuka Umunna: "The taxpayer is being massively short-changed"

Mr Umunna said the £750 minimum application was too high.

"That is a lot of money for most people - it is out of reach for many. Most of the people benefiting from this will be the speculators and the hedge funds."

The government may also sell an additional 15% of its stake in what is called an "over-allotment" option, if the demand for shares is very high.

Labour has already said that it would not renationalise Royal Mail after it is privatised.

Initially the government priced the shares at 260-330p, however, they are to be sold at between 300-330p.

Strike threat

Members of the Communication Workers Union are being balloted on a potential strike over the planned privatisation and other pay issues.

The strike vote closes on 16 October. The earliest a strike could be held is seven days after that.

John Glen, senior lecturer in economics at the Cranfield School of Management suggested demand was being driven by a government guarantee of a £130m profit to shareholders next July, meaning shareholders would get a 6.5% return on their shares,.

"(It) is a good return given what you get if you put your money in the bank at the moment," he told BBC Breakfast.

However, he noted that the privatisation was controversial. "Over the last six years, we the taxpayers have spent about £2.75bn making the Royal Mail more profitable, we've taken on £8bn of pension liabilities and of course there's the issue about whether or not the Royal Mail will guarantee to deliver to us every day, across the whole country, at a single price."

More on this story

  • Royal Mail undervalued, says Labour's Umunna

  • Why the Royal Mail privatisation has been controversial