The National Audit Office has judged that the Government’s first sale of shares in Lloyds Banking Group in September 2013 was managed effectively and provided value for money.
United Kingdom Financial Investments (UKFI) who managed the sale for the Treasury thoroughly reviewed available options for a sale. It chose a process that maintained flexibility and allowed the sale to take place quickly, once a decision to sell had been taken.
A sale including individual investors would have required up to six months of preparation and an announcement of the sale date. This would have signalled the sale to the market and limited UKFI’s flexibility to time a transaction when market conditions offered the best value. Taking account of market conditions and the fact that this was the first of a series of sales, UKFI decided to minimise risk by selling the shares only to institutional investors. Although speculation around a sale appeared regularly in the media, the share price did not fall ahead of the sale, suggesting that market participants had not known of UKFI’s detailed plans.
Ahead of the sale, UKFI commissioned an extensive analysis of the value of the shares. In the summer of 2013, the share price was close to a 12-month high and at the upper end of the range of values implied by UKFI’s analysis. UKFI priced the sale at 75p a share, a 3 per cent discount to the closing market price of just over 77p ahead of the offer. This discount compares well with the average discount of just over 4 per cent seen in the ten largest comparable sales since 2008.
Demand in the sale from institutional investors exceeded the number of shares on offer by some 2.8 times. However, over three-quarters of this demand came from institutions seen as shorter-term investors. Pricing the shares higher would have required allocating more than 60 per cent of the shares to these shorter-term investors. If these investors sold their shares soon after the sale, there was risk of a weak aftermarket and negative perceptions affecting future sales. The public spending watchdog noted that, following the sale, the market price of the shares has held steady.
Taking account of the cost of borrowing the money to buy the shares, there was a shortfall for the taxpayer of at least £230 million. This shortfall should be seen as part of the cost of securing the benefits of financial stability during the financial crisis, rather than any reflection on the sale process.