NAO says UK lost hundreds of millions through Royal Mail IPO

The UK government’s inflexible approach to the valuation of Royal Mail shares prior to last year’s privatisation cost the taxpayer hundreds of millions, the National Audit Office concluded today. Parliament’s financial watchdog issued a report today that stated that ministers were too “cautious” in setting its forecast price range for Royal Mail as the company was floated on the London Stock Exchange last October.

Despite the fact that the share offer was 24 times oversubscribed by institutions, the initial share price was set at only 330p per share.

Once trading began, the Royal Mail share price soared by 38% to 455p on the first day, and by 72% over the first five months.

The NAO said major investors made a “substantial profit” by selling their shares shortly after the IPO.

The auditors said there were “inherent limitations” in the way the government set the initial share price, which lacked flexibility when it emerged that the demand was going to exceed earlier expectations.

The UK government made £1.98bn from its sale of a 60% stake in Royal Mail, but the first day alone saw those shares worth an extra £750m.

“The Department took a cautious approach to a number of issues which, taken together, resulted in the shares being priced at a level which was substantially below that at which they started trading,” the NAO concluded in its report today.

“Although the Department achieved its primary objective of delivering a sale of shares within this Parliament it could have achieved better value for the taxpayer.”

Uncertainty

The government’s cautious approach came in part because of the uncertainty involved in the IPO, the NAO noted. The sale gave little time for Royal Mail to prove its profitability after major modernisation efforts, while the threat of strike action from the Communication Workers Union added potential risk to the IPO.

After a “huge” marketing exercise, ministers did not get binding commitments from their 21 “priority investors” ahead of the IPO. 17 of these investors indicated initially that they would buy Royal Mail shares at 250p per share. Based on this, ministers set the initial price range at 260p to 330p per share.

Subsequently, the interest of institutional shareholders in Royal Mail accelerated to the point at which there was 24 times the demand for shares than shares available. The NAO said the government’s method for testing demand levels ahead of the IPO was shown to be “not fully effective”.

The government had the option to move its price range up prior to the first day of trading, but chose not to do so on the basis of advice from its corporate finance adviser.

The NAO report today also pointed out that expectations for a significant share price increase could have prompted the government to sell fewer shares in Royal Mail in order to retain additional value, since its commitment was only to sell a majority stake, not a 60% stake. The audit suggested that the government could have retained 110m more shares, worth £363m at the offer price, while keeping its promise to sell a majority stake.

The decision to sell the 60% stake was based on advice from the government advisers suggesting that it could lead to a volatile share price movement.

Long-term shareholders

The UK government set up its IPO so that Royal Mail would enjoy the support of long-term institutional investors, but many of the government’s priority investors sold their holdings within the first few weeks of trading.

A review of the 20 largest shareholders found that between October and November seven had sold all their allocated shares and four had reduced their stake by more than half. Four of the 20 increased their stake, with two more than doubling their stake after the start of trading.

By the end of January only six of the government’s 16 priority investors remained among the largest shareholders, together holding just 12% of shares, just over half of the allocation made to the priority investors.

The NAO suggested lessons should be learned from the Royal Mail IPO when the UK government comes to sell other assets in future, such as shares from banks bailed out after the economic crisis and the 30% stake in Royal Mail that the government still retains worth about £1.7bn. Alternative sale processes should be considered, the auditors said.

The NAO also hit out at the government’s over reliance on professional advisers in determining the sale value of a company like Royal Mail.

Commenting on the report, the Comptroller and Auditor General, Amyas Morse, said the government’s sale of Royal Mail was marked by “deep caution”, and the price of this was borne by the taxpayer.

Morse said: “The Government retained 30% of the company. It could have retained even more and allowed the taxpayer to participate further in the rapidly increasing share price and thus limit the cost of to the taxpayer of its cautious approach.”

The UK government took the positives from the NAO report today, stating that the report had applauded ministers for successfully floating Royal Mail and securing the universal postal service.

Business secretary Vince Cable insisted that achieving the highest price possible “at any cost” was “never the aim of the sale”.

“The report concludes there was a real risk of a failed sale attached to pushing the price too high. And a failed sale would have been the worst outcome for tax payers and jeopardised the operation of Royal Mail going forward,” said Cable.

“The NAO confirms we have protected taxpayers from the risk of needing to offer ongoing support to the company as well as safeguarding the vital 6 day a week service that customers and businesses around the country rely on.”

CWU

The Communication Workers Union, which represents 115,000 Royal Mail workers, virtually all of whom are now also Royal Mail shareholders, said today that the NAO report “proves the sale was a get rich quick scheme which offered no value to taxpayers”.

The CWU said the audit had “exposed the government’s incompetence during the privatisation”, pointing out that the £3.3bn valuation of Royal Mail at the start of trading compared to an £8.67bn valuation made by other banks.

Billy Hayes, the CWU general secretary, described the Royal Mail IPO as a “political opportunity” for the government that had committed itself to selling the company “regardless of whether it was a good deal or not”.

“There are so many aspects to Royal Mail privatisation highlighted in this report that had appalling results. This further supports the view that the Government was desperate to get rid of Royal Mail because it fitted with their agenda. The sell-off was never about getting the best deal for taxpayers,” said Hayes.

“It makes a mockery of the Government’s line that we’re all in this together. Before the Government sold off Royal Mail, 70% of the public said they were against the move. Yet they continued regardless. The report reinforces that this was a fire-sale package created for political purposes which is simply not good enough and continues to put the future of Royal Mail at risk.”