The UK government’s Department for Business, Innovation and Skills (BIS) approach to the privatisation of the Royal Mail was too cautious, which resulted in the shares being priced at a level substantially below the low end of the price range of GBP0.260 at which they started trading, the National Audit Office (NAO) reported on Tuesday.
According to the NAO, which scrutinises public spending on behalf of Parliament, the government’s objective of selling Royal Mail was successful; however British taxpayers have borne the price of in getting Royal Mail listed on the FTSE 100. Although the government holds 30% of Royal Mail, NAO believes a higher percentage could have been retained, which would have allowed the taxpayer to participate further in the rapidly increasing share price.
Royal Mail’s shares closed at GBP0.455 pence in its first day of trading, which was 38% higher than the sale price and represented a first day increase in value of GBP750m for the new shareholders. Five months later, the shares have traded in the range of GBP0.455 pence to GBP0.615, which is worth 72% more compared to the sale price.
The NAO said that UK postal service is now a profitable commercial business with access to private capital and it intends to reward its shareholders with dividends. This means that British taxpayers are less likely to have to provide public support for the Royal Mail. However, the NAO concludes that the BIS could have achieved better value for the taxpayer. In order for the BIS to complete a sale within the time available, against the risks of industrial action and short-term market uncertainty, it reportedly conceded price tension for certainty that the transaction would be completed. The sale was also conducted to reflect the price indications of a small number of priority investors whose participation was seen as vital, along with the views of over 500 other potential investors.
Demand for shares was reportedly 24 times the maximum number available to institutional investors, but the BIS is said to have encountered the inherent limitations of the book building process. This meant that the department did not know how much demand there was for shares that existed at prices above the high end of the range of GBP0.330. The BIS judged that the risks and practical difficulties of raising the price were too great, following advice that the book building had not revealed sufficient demand at meaningfully higher prices.
Also, a small number of priority investors were allocated a larger proportion of their orders, compared to other investors. This was said to reflect the department’s expectation that the priority investors would form part of a stable, long-term and supportive shareholder base. The NAO revealed that within a few weeks of the stock market launch, almost half of these allocated shares have been sold at a substantial profit.
Following recommendations from the department’s advisers, it decided to sell the full 60% of shares available for sale, however the NAO said the BIS could have retained 110 million more shares worth GBP363m million at the offer price. This would still have achieved the policy objective of reducing the government’s ownership to below 50%.
The spending watchdog added that although three surplus properties with a market value of more than GBP200m were disclosed in the prospectus, it does not believe that this value was recovered when Royal Mail was sold.