By floating Royal Mail on the Stock Exchange within this Parliament, the Government achieved its primary objective, according to the National Audit Office.
The spending watchdog considers, however, that the Department for Business, Innovation and Skills took a cautious approach to a number of issues which together resulted in the shares being priced at a level substantially below that at which they started trading. On the first day of trading, Royal Mail’s shares closed at 455 pence, 38 per cent higher than their sale price. This represented a first day increase in value of £750 million for the new shareholders. Five months later, the shares were worth 72 per cent more than the sale price and have traded in the range of 455 pence to 615 pence.
Today’s report recognizes that, following substantial intervention by the Department, Royal Mail is now a profitable commercial business with access to private capital and intends to reward its shareholders with dividends. It is now less likely that the taxpayer will have to provide public support for the universal postal service.
The NAO concludes, however, that the Department could have achieved better value for the taxpayer. It conceded price tension for certainty that the transaction would be completed, by setting a cautious low end of the price range (260 pence). This was to achieve the Department’s priority to complete a sale within the time available, against the risks of industrial action and short-term market uncertainty; and to reflect the price indications of a small number of priority investors whose participation was seen as vital, as well the views of over 500 other potential investors.
The banking syndicate used a ‘book-building’ process (to generate demand for shares and determine the price in the market for shares). Demand for shares was 24 times the maximum number available to institutional investors but the Department encountered the inherent limitations of the book building process which meant it did not know how much demand for shares existed at prices above the high end of the range set by the Department (330 pence). The Department was advised that the book building had not revealed sufficient demand at meaningfully higher prices and therefore judged that the risks and practical difficulties of raising the price were too great.
A small number of priority investors were allocated a larger proportion of their orders than other investors to reflect the Department’s expectation that the priority investors would form part of a stable, long-term and supportive shareholder base. However, almost half of the shares allocated to them had been sold at a substantial profit within a few weeks of the stock market launch.
According to today’s report, the Department has benefited from the increase in the share price via the 30 per cent of the shares that it has retained. However, on the advice of its advisers, it decided to sell the full 60 per cent of shares available for sale. It could have retained 110 million more shares worth £363 million at the offer price, while still achieving the policy objective of reducing the government’s ownership to below 50 per cent.
Although three surplus properties with a market value of more than £200 million were disclosed in the prospectus, the NAO does not believe that the basis on which Royal Mail was sold recovered this value.