Strong demand for the controversial privatisation of Royal Mail prompted the government to explore whether it could extract a higher price for the postal operator, but key institutional investors signalled they would drop out if they had to pay more than 330p a share.
The government’s concern that it was selling the 500-year-old company too cheaply emerged as the shares soared 38 per cent on the first day of conditional trading on Friday. The premium is higher than the big privatisations of the 1980s and 1990s, provoking renewed claims that the postal operator had been undervalued.
A Whitehall official told the Financial Times that the government had asked Lazard, the investment bank advising it on the deal, to review the price range in the past couple of weeks amid exceptionally high demand.
However, it was decided that the range was pitched correctly after a number of large institutional investors indicated they would drop out if it went higher. The official pointed out that hundreds of potential shareholders had dropped out even at 300p-330p.
“If we had pitched too high and the float had not got away, that would have been a disaster,” the official said. The government also did not want the share price to crash and leave small investors sitting on losses, they said.
After hitting an initial high of 459p, as institutions sought to top up their holdings, the shares closed at 455p on Friday. That valued the company at £4.5bn, or £1.2bn above the level implied by the offer price. The government, which is selling up to 60 per cent of Royal Mail, will raise £1.7-£2bn depending on whether an overallotment option is exercised.
It could have raised £650m-£750m more had it been able to sell the company at Friday’s closing price. The first-day mark-up was bigger than that seen in 1980s privatisations such as Rolls-Royce (37 per cent), British Airways (35 per cent), British Telecom (32 per cent) and British Gas (9.5 per cent).
Vince Cable, business secretary, defended the pricing, saying the “froth and speculation” would die down. Ministers believe the market price is likely to fall to something like the offer price in about a month.
But Ed Miliband, Labour leader, said: “It’s a fire sale of a great institution at a knock-down price. It has been undervalued for taxpayers and undervalued for customers.”
Some big UK institutional investors criticised the way the sale was handled by the government and banks. They questioned the need for a global roadshow to sell the shares, saying this was unnecessary as there was clearly demand at home.
There were also complaints that shares were allocated unfairly. One head of equity at a large European asset management group said: “I would like the Electoral Reform Society or a body like that to allocate shares rather than the banks.”
Private investors moved quickly on Friday morning to take profits. Broker TD Direct Investing reported that close to 90 per cent of clients trading on Friday chose to sell their stake. The high levels of demand led one intermediary’s website to crash, leaving angry Hargreaves Lansdown customers complaining on social media.
Brokers including Interactive Investor said that trading on the first day exceeded all expectations, and speculated that many of those selling were investors unimpressed with the £750 per person allocation of shares.
“I think future government privatisations might be a harder sell to wealthy investors who tried to invest more than £10,000 this time around and were turned away completely,” said Tom McPhail at Hargreaves Lansdown.
