Was Royal Mail sold too cheaply?

[Budfrog]

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With £27bn of investors' money having chased shares priced at just £1.7bn, and with Royal Mail's share price trading at more than 450p this morning, compared with the 330p a share the government is receiving, there is a certainly a case for saying the government could have got more.

And just to put this in slightly more concrete terms, at 330p the government is receiving a fraction under £2bn, if (as is very likely) its bankers exercise what is known as the over-allotment option (if you really want to know more about this, see me after class).

However if the shares had been priced at around this morning's market price, at say 450p, the Exchequer would have received £2.7bn.

So should taxpayers be raging that they've lost a potential windfall of £700m, which would not have paid off the trillion pound national debt but would have paid for a couple of miles of High Speed 2?

There are a number of things to say about this. And the first is that pricing is more art than science, and no vendor of a large number of shares will ever get the best price available.

Also the price range for the privatisation shares was set by the government at a time when prevailing opinion was that this was a risky declining business hobbled by lamentable industrial relations; it was only in the course of the share sale that investors noticed a parcels operation growing very nicely, an endowment of potentially valuable properties in city centres and the fat income the company is promising to pay shareholders.

What is particularly striking is that Royal Mail's own people are confident that they are in a business that will prosper: I have learned that 15,000 Royal Mail employees, almost a tenth of the workforce, have paid £52m to buy Royal Mail shares (in addition to the free shares being handed to all Royal Mail employees).

However, what some may think is odd - including, presumably, ministers - is that investors have completely ignored the risk that Royal Mail could imminently be brought to a grinding halt by a strike. The frenzy to buy Royal Mail shares probably tells you quite a lot about the extent to which better-off people think the economy is recovering - which the government is not going to rage about.

That said, a 36% gap between market price and privatisation price is far wider than would normally be thought necessary to whet punters' appetite for future privatisations (remember that the Department for Business Innovation and Skills has another 30% of Royal Mail to flog, probably next summer, so ministers would not want to burn investors buying in this initial share offer).

So something does seem to have gone a bit cock-eyed with the sale. What?

Well the privatisation prospectus explicitly allowed the government to revise the sale price up, outside of the indicated range, if demand for the shares turned out to be much greater than expected. With big investment institutions putting up money for the shares worth 20 times what was on offer to them, and retail investors bidding for seven times what was available, it is fair to say demand was greater than anticipated.

So why did the relevant ministers, Vince Cable and Michael Fallon, sell at the top of the indicated range, rather than breaking through that threshold?

They had what they regard as non-partisan advice, from the investment bank Lazards - which was not involved in actually placing the shares, and therefore had no vested interest, in theory - that 330p was a fair price.

And that advice was apparently underwritten by the government's own internal counsellor on these issues, the UK Shareholder Executive.

But, that said, Cable and Fallon are grown-ups and know that ultimately the buck stops with them: advisers advise, ministers decide.

So they know that if the share price stays at this level for weeks and months, they will be vulnerable to criticism - and, probably, to a ticking off by the National Audit Office.

But Vince Cable has already made clear that he thinks the market is wrong to price the shares at these levels, by talking about the need to wait until the "froth" has been blown off.

Or to put it another way, he and Fallon assume that Royal Mail shares will be back near the offer price before Christmas.

Which points towards the most delicious political spat I've seen in a long time.

Labour's spokesman on all this, Chuka Umunna, in chastising Cable and Fallon for allegedly selling Royal Mail too cheaply, has in effect been shouting - at the most sensitive period of privatisation - "the government is selling five pound notes for 50p, fill your boots."

Whereas the capitalist Tory Fallon and leftish Lib Dem Cable have been saying to retail investors, "I'd take care if I were you, this stock-market game can be a bit dangerous."

So what is quite striking is that 700,000 people with a bit of money to spare voted Umunna, by stampeding to apply for the shares - though whether they are natural Labour supporters is another thing altogether.

Here is the intriguing political calculation.

If Royal Mail shares stay at these levels, the government may well in time be found guilty of having privatised the company too cheaply.

But ministers have just delivered a tidy windfall of £187m to 690,000 people who've been allocated £750 of shares each. That is a potential profit of almost £250 for each of them.

Which is a fair number of people who are probably prepared to buy Fallon and Cable a drink.

[krussel]

I feel I ve been sold in a slave market today with everyone putting there mark up on my head as I ve been sold down the river.

[DavidUK]

It's a bit rich for Labour to suggest the taxpayer hasn't received good value for Royal Mail when they wholeheartedly support the Tories giving away £1billion a month of taxpayers money in overseas aid. In other words, if RM had been sold at £4.30 per share instead of £3.30per share, the extra revenue raised would have paid the overseas aid budget for ONE month. UKIP are the only party committed to ending this madness.

[dt123]

It's a bit rich for Labour to suggest the taxpayer hasn't received good value for Royal Mail when they wholeheartedly support the Tories giving away £1billion a month of taxpayers money in overseas aid. In other words, if RM had been sold at £4.30 per share instead of £3.30per share, the extra revenue raised would have paid the overseas aid budget for ONE month. UKIP are the only party committed to ending this madness.

What a really good post, you're dead right David and Nigel Farage, Neil Hamilton and Godfrey Bloom are just the right men to get us out of this mess.......Nurse !

[TrueBlueTerrier]

But Vince Cable has already made clear that he thinks the market is wrong to price the shares at these levels, by talking about the need to wait until the "froth" has been blown off.

Kipper-Williams-Royal-Mai-003.jpg

[Shambles]

[fishtank]

UKIP are the only party committed.

I'm not really surprised given the level of crazy surrounding the party.
The only thing we haven't seen yet from UKIP is someone putting their underpants on their head,sticking two pencils up their nose and answering every question with "wibble".
There's always next year's party conference though.

[123456]

why not ukip.we could all continue to vote labour,tory,lib dems but......why?british politics is in a sorry state,why continue to support the same old shitehawks.definiton of insanity........... doing the same thing over,and over and expecting different results..you know whats gonna happen,its happened countless times before,,time for a shake up on many levels..

[fishtank]

why not ukip

Firstly because there is nothing new or different about UKIP.
It's the same old xenophobic,isolationist elitist bollocks we've been hearing from the right-wing Tory Eurosceptics for 50 years at least.
They have simply found a new home for their voice.

Secondly it isn't even the Tory A-team of Eurosceptic loons,It's a mixed bunch of failed councilors,old duffers,racists and NIMBY moaners.

Thirdly they have no coherent policies.

Fourthly they can't agree on anything,especially coherent policies.

The list is not exhaustive but even on trivialities purple is a stupid colour and UKIP is an idiotic name for a party.

[TrueBlueTerrier]

Why Not UKIP ? - for the same reason I don't vote for the Conservatives or Lib Dems, and don't want to vote for Labour outside of keeping the Cons out - Party Politics is a bankrupt system that allows people who have more money an unfair influence over policies, and that tries to keep the public out of politics by demonising their organisations such as Unions and campaigning groups.

UKIP may be a small party but they are one of the major players of party politics, especially in the European Parliament, and it won't change if they gain power in the UK.

[cloherty1976]

Why Not UKIP ? - for the same reason I don't vote for the Conservatives or Lib Dems, and don't want to vote for Labour outside of keeping the Cons out - Party Politics is a bankrupt system that allows people who have more money an unfair influence over policies, and that tries to keep the public out of politics by demonising their organisations such as Unions and campaigning groups.

UKIP may be a small party but they are one of the major players of party politics, especially in the European Parliament, and it won't change if they gain power in the UK.

Not in our lifetime will ukip be in power, but do agree would not vote for the others..

[UnhappyGremlin]

UKIP are the only party committed.

I'm not really surprised given the level of crazy surrounding the party.
The only thing we haven't seen yet from UKIP is someone putting their underpants on their head,sticking two pencils up their nose and answering every question with "wibble".
There's always next year's party conference though.

[123456]

no body was seriously saying ukip could win power but may very well be worth a vote.if only to make the political party politics defined in terms of policy,(call it a protest vote)if you like,but parties like ukip with a growing voice in this country could possibly do some good if only to buck the ideas up of this boring,could not care less attitude we have at present,,the first sniff of public reaction to a positive policy or popular idea and the main 3 parties start listening.i just cannot think about voting for lab,cons or lib-dem..so my vote will go to ukip this time,if only to show how pissed off i am at the rest..shoot me!

[Shambles]

Slums may well be breeding grounds of crime,
but middle class suburbs are incubators of
apathy and delirium....?