The Government sold 60% of its shares in Royal Mail in October 2013 to private investors for 330 pence each, generating proceeds of £1,980 million. Employees were allocated 10% of the shares and the Government retained the remaining 30%. Royal Mail shares were later admitted to the main London Stock Exchange (FTSE 100). On the first day of conditional trading Royal Mail’s shares closed at 455 pence (or 38% higher than the sale price) and in the following five months have traded in the range of 455 pence to 615 pence. At market close on 3 April the price was 550.5 pence a share.
A report by the National Audit Office (NAO) on the Privatisation of Royal Mail, published 1 April, concluded that “…although the Department [of Business, Innovation and Skills] achieved its primary objective of delivering a sale of shares within this Parliament it could have achieved better value for the taxpayer.”
The report observed that the Department’s cautious approach resulted in the shares being priced substantially below their initial trading price – it noted that this approach had been based on the views of a small group of priority investors who were concerned about short-term market uncertainties and the risk of industrial action.
When the Department came to market the shares more widely, the process used did not, in the NAO’s view, allow it to understand just how much more investors would be willing to pay above the upper end of its price range of 330 pence a share. The fact that the price on the first day of trading was 38 per cent above the offer price and has remained well above that level in the following five months illustrated the limitations of the process.
There has been considerable press comment on the report and who has benefitted most from the sale. Attention has been drawn to the £750 million increase in value of shares on the first day of trading and to the fact that some of the priority shareholders have subsequently sold their share allocation at a considerable profit. (For example, Taxpayer lost out to big investors in mail float, says watchdog,Financial Times, 1 April 2014)
The concerns reflected those raised earlier by the Business, Innovation and Skills Select Committee in their hearings shortly after the flotation of Royal Mail in November 2013. However, the Secretary of State, Vince Cable, defended the Department’s “cautious and measured approach” as appropriate to its primary objective and in light of the risks involved.
The NAO also made a number of recommendations; unsurprisingly these focussed on the need for better ways of selling shares and capturing investors’ appetite for equity in terms of the volume of shares they are willing to buy and the price they would pay. They also called for reduced Government reliance on outside professional advisers, suggesting that advisers should have a specific incentive to optimise the overall value for the taxpayer rather than just ensure the transaction was completed.