The shares were priced well, many investors were enticed into the ring and the markets responded favourably
In 51 years working in the City of London rarely have I heard such drivel spoken by senior politicians, trade union leaders and fully paid-up members of the bleeding-heart club over the valuation of the Royal Mail’s flotation. It is extraordinary how many ill-informed observers can have such strong and exaggerated opinions on a subject they are so inadequately versed in.
I have to admit that given a free hand, Vince Cable would not be my choice as business secretary; he is nothing like upbeat enough for me as the main standard bearer of UK plc. However, apart from unreasonably criticising my colleague Gert Zonneveld for independently overvaluing the Royal Mail, the government and particularly Cable and Michael Fallon, Goldman Sachs and Royal Mail Group’s board of directors have not put a foot wrong in bringing the business to the market place.
Valuations are a matter of interpretations. I am extremely proud that Zonneveld was the first independent analyst to flag up the company’s credentials, thus encouraging investors to get stuck into Royal Mail. Yes, superficially this share issue appeared cheap, because light-tough regulation should give the company the freedom to raise prices to their 29 million customers, assuming it remains competitive – thus widening their profit margins from 3.5% to between 5% and 10%. Royal Mail’s property portfolio is attractive, I don’t deny, and the fact the pension hole has been satisfactorily negotiated is helpful. Notwithstanding these positive caveats, the vagaries and imponderables of the commercial world still prevail. Though Royal Mail has a captive domestic market, it still remains behind the curve internationally, up against the likes of FedEx, UPS and Deutsche Post. Chief executive Moya Greene is going to have to pull out all the stops to remain competitive. Also, who is to say that there will not be industrial strife in the months to come?
So 552 million shares were offered on Friday to wholesale investors (67%) and retail investors (33% with over 695,000 applications) at 330p. Early skirmishes saw the share price reach 456p, valuing the group at £4.6bn rather than £3.3bn – suggesting that this share offering had been recklessly priced. But not so – sadly for Labour business spokesman Chuka Umunna and his disconsolate cohorts.
The market’s reaction was positive. The valuation offered investors value. It enticed them into the ring. Had the flotation been offered with full value, who would have bought it? Very few. You have to give investors a sporting chance.
The previous Labour government messed around in talking about privatising the Royal Mail, resulting in Lord Mandelson and Gordon Brown squabbling over triviality. This issue has been welcomed by its shareholders – old and new. Perhaps retail shareholders have proportionately done better than the wholesale brigade, just as Cable told us they would. But the deal is done and dusted. It’s off the government’s books. Governments are notoriously the worst business managers imaginable; jobs have probably been saved as a result of this action. So well done to the Department for Business, Innovation and Skills for a task clinically executed for the benefit of all.
Though I doubt the government will admit to any such thought process, this sale may well prove to be the sprat that caught some huge mackerels in the form of future public offerings. In the months to come, TSB – a part of Lloyd Banking Group – maybe the Co-op, and eventually RBS will be offered to the public for sale. The investor does not want a bad taste left in his or her mouth, with the government needing to dispose of billions of assets to help balance the books. So all the privatisation’s detractors should be pragmatic – and stop moaning.
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