RM sale underpriced by 1bn, says select committee report

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Royal Mail sale underpriced by £1bn, says scathing select committee report

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Taxpayers lost out on £1bn because the government and its City advisers underpriced the privatisation of Royal Mail, a committee of MPs says today.

In a highly critical report, the Business, Innovation and Skills (Bis) committee said the government worried too much about pushing the privatisation through at the expense of getting the best price for taxpayers.

Royal Mail was privatised in October when the government sold 60% of its stake at 330p a share, valuing the company at £3.3bn. On their first day of trading, the shares jumped by 38% – far higher than normal for a flotation – and continued to rise after that. They hit a high of 615p on 15 January and closed at 474p on Thursday, valuing Royal Mail at £1.4bn more than the sale price.

In evidence to the committee, Vince Cable, the business secretary, and his minister Michael Fallon defended the sale price by saying the risk of a nationwide strike hung over Royal Mail during the privatisation, making investors wary about the company's prospects. Royal Mail and the Communication Workers' Union (CWU) settled their long-running dispute soon after the flotation in an agreement that promised a new era of industrial harmony.

Cable dismissed the post-privatisation rise in Royal Mail's share price at the time as "froth" that would settle once the market had judged the company's value. The committee criticised Cable for not defining froth properly and for stretching the period he had in mind from the "immediate aftermath" of the flotation to months or years later.

Adrian Bailey, chairman of the committee, said: "It's not at all clear that the government's sale of Royal Mail has brought an adequate and appropriate return for taxpayers. The government cannot blithely dismiss as 'froth' our committee's concern that the low issue price of this prime public asset has cost the taxpayer around a billion pounds."

Cable's department said the privatisation raised £2bn for taxpayers and put Royal Mail on a secure footing as a publicly traded company able to raise capital from the market. It said the report ignored the size of the share sale and included factual errors.

The department said: "The committee's views on the share price are based entirely on hindsight and ignore that we were selling 600m shares – they found no evidence that the department or its advisers missed vital information prior to sale. The share price remains very volatile to this day, as the business secretary told the committee, and has dropped 25% from its high point."

The National Audit Office (NAO) has criticised Cable for refusing to increase Royal Mail's flotation price despite widespread fears the 500-year-old company was being sold on the cheap. He has refused to apologise and still describes the privatisation as a success.

But on Wednesday, with the committee's report looming, Cable announced a review of the privatisation process, headed by Lord Myners, a City veteran and minister in the last government.

The MPs were also scathing about the role of Cable's investment banking advisers – Lazard, Goldman Sachs and UBS – as well as the shareholder executive, the government team that works on privatisations. In evidence to the committee, the advisers insisted they had got the best deal possible, despite admitting they had considered recommending the government to seek a higher price from investors.

The advisers' work on the privatisation was "not up to standard" and did not get the best deal for taxpayers, the MPs said.

The report, backed unanimously by MPs from the three major parties, criticised Cable's attempts to secure long-term investors for Royal Mail by giving preferred status to certain fund managers. They singled out Cable's unwillingness to publish the list of investors until the day before he appeared at the committee and called for more information about those that had sold their stakes.

The government also ignored NAO recommendations about the treatment of three large London sites included in the sale. The NAO argued for their exclusion from the sale or for provisions for the government to get money back from their later sale. After the privatisation, the NAO said the government's £200m valuation of the sites underestimated their worth.

Bailey said: "This was the most significant privatisation in years. We believe that fear of failure and poor quality advice led to a significant underestimate of the demand for Royal Mail shares. The government's inclusion of Royal Mail's 'surplus' assets in the sell-off, without the prospect of clawing back future proceeds, may also mean the taxpayer losing out once again."

Billy Hayes, general secretary of the CWU, which opposed privatisation, said: "The Bis select committee's damning report published today shows the extent of the government's incompetence in the privatisation of Royal Mail. The only froth came from Vince Cable and Michael Fallon's allegations that threat of strike action from the CWU last summer affected the share price."

The committee accepted that the government succeeded in privatising Royal Mail in this parliament and giving employees a stake in the business but said it failed to achieve its third aim of securing value for money.

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Taxpayers have lost £1 billion over the privatisation of Royal Mail because the Government underestimated demand for shares, a committee of MPs has reported.

Ministers were accused of being afraid to fail over the controversial sell-off last year, and of receiving "poor quality" advice.

The Business Select Committee said taxpayers were missing out on "significant value."

In a hard-hitting report, the committee also expressed concern that the Government had failed to get an adequate return on privatised Royal Mail assets, such as multi-million pound sites in London.

The MPs concluded that the advice ministers received on the sale was not up to standard.

The committee found the Shareholder Executive, Lazard, the Government's financial adviser, and UBS and Goldman Sachs (the Government's global co-ordinators) failed to gauge demand at higher price levels and did not give appropriate consideration to maximising value for money for the taxpayer.

Committee chairman Adrian Bailey said: "It's not at all clear that the Government's sale of Royal Mail has brought an adequate and appropriate return for taxpayers. The basic facts are that the offer price was 330p per share, the price has risen as high as 618p per share, and now stands around 473p.

"The Government cannot blithely dismiss as 'froth' our committee's concern that the low issue price of this prime public asset has cost the taxpayer around a billion pounds."

The committee said it was "disturbed" that the Government may have failed to reap the benefits of the sale of Royal Mail assets included at privatisation, including three sites in London valued by the Business Department at around £200 million but reported by the National Audit Office (NAO) to possess a 'hidden value' worth £330 million to £830 million.

The committee found the Government ignored established NAO recommendations that these assets should either be removed from the privatisation process or that claw back provisions be inserted on the future sale of the properties

Mr Bailey added: " This was the most significant privatisation in years. We believe that fear of failure and poor quality advice led to a significant underestimate of the demand for Royal Mail shares.

"The Government's inclusion of Royal Mail's 'surplus' assets in the sell-off, without the prospect of clawing back future proceeds, may also mean the taxpayer losing out once again".

The MPs found that many priority investors "bought cheaply and sold quickly" at a profit, adding that the current ownership of Royal Mail by long-term investors had "little to do" with the actions of Business Secretary Vince Cable.

The Government was urged to publish a list of the preferred investors, including information on which investors sold their shareholding, and at what price.

The committee recommended that companies advising the Government on share issues should be excluded from becoming a preferred investor.

A review has been launched into the process for selling government assets following controversy over the privatisation.

Former city minister Lord Myners will chair a panel of experts to look at alternatives to the Initial Public Offerings (IPOs) as well as looking into the so-called "book building" process used ahead of a share sale to gauge investor demand.

The review, launched by the Business Department earlier this week, was one of the recommendations made by the NAO in its report into the Government's sale of Royal Mail last November.

The department said it will inform future decision-making in the disposal of shares owned by government.

Ian Murray, shadow trade minister, said: "Ministers pressed ahead with their unnecessary and botched fire sale of Royal Mail, despite widespread opposition and warnings. As a result, taxpayers have been short changed by hundreds of millions of pounds while the Government's 'priority' City investors made a killing at the public's expense.

"The cross-party committee's damning report reinforces the significant criticisms which have already been made by the National Audit Office and others. By launching an inquiry into the Royal Mail fire sale this week, ministers have admitted what everyone else has known for months on the huge failings there have been. David Cameron's government still has serious questions to answer."

Communication Workers Union general secretary Billy Hayes said: "The committee's damning report shows the extent of the Government's incompetence in the privatisation of Royal Mail.

"The committee rightly dismissed the Business Secretary's assertion that an increase in Royal Mail's share price was 'froth'. The only froth came from Vince Cable and Michael Fallon's allegations that the threat of strike action from the CWU last summer affected the share price, which the committee said was 'over-emphasised'.

"This is the second report which has exposed the Government's bungling of the privatisation of Royal Mail as a political opportunity. Both the NAO report earlier this year and today's report stated that shares were grossly undersold, losing taxpayers hundreds of millions of pounds.

"Cable's announcement yesterday to review the privatisation process of national assets is a cynical attempt at damage limitation. Surely the bodged job the Government did on the privatisation of Royal Mail is a lesson in itself - leave the family silver where it is instead of pawning it off."

A Business Department spokesperson said: "This report rightly acknowledges that BIS achieved the Royal Mail sale objectives. It was vital to protect the Universal Postal Service - the one price goes anywhere letter delivery service, six days a week - and guard against any need for Royal Mail to request additional taxpayer support.

"The sale also raised almost £2 billion for taxpayers, offered 150,000 Royal Mail employees shares in the company for free, created a FTSE 100 company able to access private capital to ensure it has a sustainable future and allowed members of the public to buy shares in the company.

"The committee's views on the share price are based entirely on hindsight and ignore that we were selling 600 million shares. They found no evidence that the department or its advisers missed vital information prior to sale. The share price remains very volatile to this day - as the Business Secretary told the committee - and has dropped 25% from its high point.

"The committee also endorses the National Audit Office's finding that there is no evidence that the Government's independent adviser, Lazard, or any other bank involved in the sale, breached the Chinese walls that existed between different and unrelated parts of the business.

"It's disappointing that the select committee report contains a number of factual errors and misunderstandings of the evidence that ministers, officials and our advisers gave to the panel. It is wrong for example to suggest that BIS can publish information about when and for what price investors sold their shares. The department simply does not hold that information which only investors have access to."

Mr Cable told the BBC: "They now have the benefit of hindsight, which we didn't have at the time. We sold at a price that was regarded as the best that could be achieved in the context in which we sold it."

He added: "The point we have stressed, and I've stressed over and again, that the price of shares is very, very volatile - these things go up and down and we've seen in the last few weeks the price of Royal Mail shares actually falling like a stone."

Mr Bailey said there were concerns about the firms giving advice also being involved as preferred investors, with "Chinese walls" separating the different arms of the companies.

He said: "It's not uncommon but that doesn't mean to say that it's right.

"It's very important that the Government, above all, when it does sell off a public asset does so through a process which quite clearly demonstrates that nobody advising has a conflict of interest."

He told BBC Radio 4's Today: "Ultimately the blame lies with the Government, the buck stops with the Government, but it's quite clear they were very badly advised. It does call into question the whole process by which the advisers were appointed and the quality of advice the Government received."

Deputy Prime Minister Nick Clegg defended Mr Cable, saying: "I think what you are seeing is a lot of wisdom with hindsight."

He told LBC: "The Royal Mail's share prices have gyrated wildly and I suspect will continue to do so."

But the Deputy Prime Minister refused to agree to a bet with host Nick Ferrari that the price would remain above the initial offer of 330p.

He said: "You cannot guarantee it's going to be 330p, and it's unfair for people now to start vilifying Vince for somehow not being able to predict the future when clearly he couldn't."

Mr Clegg said the Business Secretary should not be expected to be a "soothsayer", and added: "He has given thousands of people working in the Royal Mail a stake in it, he has given millions of people a guarantee that the universal postal provision of six days a week will be provided across the whole of the country, and crucially he has ensured that future taxpayers won't be on the hook for billions of pounds of further subsidies to the Royal Mail."

Chancellor George Osborne told LBC the Government got the "right price as advised at the time" for the Royal Mail.

Asked if the Treasury had warned Mr Cable that the price was too low, he replied: "No, the Treasury absolutely supported the sale of Royal Mail and agreed the approach to the sale and the share price."