Myners review backs government over Royal Mail share valuation

The UK government has been largely absolved of underpricing Royal Mail following a review by former minister Lord Myners. The review did suggest that Royal Mail shares could have been priced nearly 10% higher than they were as the company was floated on the London Stock Exchange last October, which could have brought the UK taxpayer an additional £180m.

But it said this would have led to more risk that the process would have failed, and said subsequent trading would never have reached the levels they did.

The review by Myners, the financial services secretary under Prime Minister Gordon Brown, said price ranges set for an IPO should be changed if demand levels prove unexpectedly high or low. Royal Mail shares were more than 23 times oversubscribed by institutional investors prior to the flotation.

The report also suggested that the privatisation process should be more transparent in future, potentially using some kind of auction process to allocate shares.

But despite suggesting that the share price could have been set as high as 360p, 9% higher than the 330p price chosen by the government, overall Lord Myners said he believed the “complex” privatisation of Royal Mail was “executed with considerable professionalism”.

“The standard bookbuilding process does have
inherent limitations. Some of these were evident in this transaction,” he said.

“It is possible that the Royal Mail issue might have priced a little higher had the bookbuilding process formally tested interest at levels above 330p per share, but I do not believe that this would have led to an IPO priced anywhere close to the level of initial trading.”

Vince Cable, the business secretary who faced a barrage of criticism over Royal Mail’s initial valuation after the IPO, said today he wanted to explore how digital auctions could improve the privatisation process.

But Cable said of the Myners verdict on the Royal Mail sale: “I welcome his comment that the sale was executed with considerable professionalism and that any decision to try to have priced the shares higher would have been risky. We were right not to take that risk.”

Pilot fish

The Myners review was commissioned by Cable following the National Audit Office’s report, which said back in April that a “cautious” approach by the Department for Business in setting the initial price for Royal Mail shares ahead of last October’s IPO meant the UK taxpayer missed out on as much as £750m.

The report out today said favourable treatment given by the government to major investors selected as “pilot fish” prior to the IPO “could have been more transparent”. It said the process should have been based on price leadership, and that there had been “no pressure” on the potential major investors to push up the offer price as they helped shape the initial IPO share price.

Feedback from the pilot fish — taking into consideration factors including the state of the postal market and a potential strike threat from the unions — helped the government decide on the IPO price range. But the Myners report said that if it had been a private company selling off Royal Mail, it would have been “unlikely” to base the IPO price on a “verbal communication” from pilot fish investors.

As a result of the 260p to 330p valuation of Royal Mail shares, the first day of offering to institutional investors saw the total shares 23.7 times oversubscribed.

The report suggested that a 350-360p price could have been achieved by the government. At the upper value, this would have added about £180m to the sum received by the government in the IPO.

The Myners report said of this high demand for Royal Mail shares: “On the basis of significant interest at the very top of the range in the first few days of bookbuilding, and with the benefit of hindsight, the top of the range could have
been increased. We acknowledge that this would have added uncertainty and risk.”

Royal Mail share prices hit 455p per share after the first day of trading on the London Stock Exchange, and two weeks later reached 555p. They peaked at 615p mid-January 2014.

The Myners report, which described the market for Royal Mail shares following the IPO as “highly unusual”, said it was then “inevitable” that the major investors who had been pilot fish would sell much of their holdings, despite the understanding that they were there to be long-term investors, since the shares were “over-valued” at their peak.

The report noted that a year after listing, Royal Mail shares were trading in line with international comparators. This morning, shares were trading at 396.5p per share.

“Cover up”

The Communication Workers Union, which represents about 115,000 Royal Mail non-managerial staff, today described the Myners report as “a cover-up”.

Billy Hayes, CWU general secretary, said: “Vince Cable appointed Lord Myners to mark his homework and unsurprisingly he’s endorsed the Government’s actions. As we anticipated from a government-commissioned report on privatisation of Royal Mail, it’s a cover-up.

“It is plain wrong for Lord Myners to say no evidence was found that the share price was valued too low. What about the fact that the value of shares rocketed on the first day of trading and was massively over-subscribed? And to say there were no conflicts of interest between the companies advising the Government and those making millions of pounds from the sale from recommendations to clients is laughable.”