Royal Mail's Nightmare: A Booming IPO

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When Facebook Inc. first sold shares to the public last year, outrage and lawsuits followed after the stock quickly fell below the offering price, costing investors billions.

This week the deadline ended for investors to buy shares in the privatization of the U.K.'s Royal Mail, the 500-year-old postal service that even former Prime Minister Margaret Thatcher didn't dare sell. A public uproar might be in the cards as well -- only this time it will be triggered if the share price rises too much once trading begins.

The reason for the difference is simple: Facebook was an IPO and this is a government asset sale. Any large and sudden increase in Royal Mail's share price from the maximum 3.30 pounds ($5.26) the government has set would imply the asset was sold cheap. It would be seen as a windfall for rich City investors at the expense of taxpayers.

And given that opinion polls say most Britons don't want to see Royal Mail sold in the first place, that's political poison. Conditional trading among the big investors will start Oct. 11, with open trading on the London Stock Exchange on Oct. 15.

The U.K.'s Labour party opposes the sale on principle, just as it did Thatcher's many privatizations in the 1980s. It argues that Royal Mail is worth much more than the maximum 3.3 billion pounds at which it has been priced, because the government has undervalued prime pieces of surplus property that go with the sale. Most of the company's 150,000 employees are against the privatization, too, even though they are receiving 10 percent of the stock for free. The company has said that job losses will follow.

A gray market in the stock run by the betting company IG Index has projected an initial bump in the share price of about 20 percent, with the offering heavily oversubscribed. The government's nightmare is that there is a big spike in early trading, followed by a tumble as speculators take a quick profit and sell.

The stock will have a dividend yield more than 6 percent, so there is some reason to hold on. As a long-term investment, though, Royal Mail looks like a bet for brave. The company's traditional letter delivery service is in decline. It is now dependent on delivering packages for mail-order companies, in particular Amazon.com Inc. What would happen if Amazon.com found another company to deliver its supersaver packages? Or if the Commercial Workers Union tells its members to stop work, when the results of a strike ballot are announced the day after the IPO?