The Government delivered on Royal Mail after all

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The Royal Mail deal was meant to be a celebratory moment for the Government - now it looks like they and the investment bankers got it right after all.

The jump in Royal Mail's share price led an almighty backlash against the Government.

It could prove to be one of the most unlikely turnarounds ever seen. Last week marked the one-year anniversary of the Royal Mail float, one of the largest and most controversial privatisations the country has ever seen.

The huge jump in the company’s share price on the first day of conditional trading and in the days and weeks that followed led to such an almighty backlash against the Government that it sparked a Parliamentary hearing.

The deal was meant to be a celebratory moment for the Government as it successfully offloaded around 60pc of the company against a backdrop of tricky markets, raising £2bn for the Treasury in the process.

Yet, almost immediately things turned sour and before long it had turned into a complete nightmare. The shares, which the Government had sold at 330p to a select bunch of City investors, opened at 403p in the first day of trading, then soared a whopping 38pc.

This increase, coupled with fevered appetite for the shares in the weeks following, pushed the price up further and in January, the price hit a high of 616p, proof, the critics argued, that the Government had been sold a dog by deceitful bankers.

MPs publicly lambasted the advisers who advised the Government as “cultish” and “not very clever” and the National Audit Office penned a damning report into the float price, criticising the seller for not maximising its own profits. In short, the Government was absolutely slaughtered.

But in the weeks approaching the one-year anniversary of the float, something remarkable has started to happen. For the first time, several respected analysts are daring to suggest that maybe, just maybe, the privatisation wasn’t such a disaster after all.

One or two have even gone further, presumably fearful that they might receive a beating with a postbag, venturing that the float has instead turned out to be something of a success after all.

Step forward Mr Michael Hewson, chief market analyst at CMC Markets, who this week uttered the brave words:
“Much as I hate to defend politicians, and particularly [Business Secretary] Vince Cable, he was right in saying that there was an awful lot of froth in the share price in the months after the initial public offering,”.

So what encouraged Mr Hewson to take such a contrarian view? Since the start of this year, the share price has broadly been in decline. In late September, it dipped below 400p for the first time since the float, and has hovered around that level since, closing at 400p on Friday. According to Hewson, the share price is now settling at a sensible level that more accurately reflects Royal Mail’s trading prospects.

Although there is still plenty of negative sentiment surrounding the debacle, the emergence of authoritative voices such as Mr Hewson are important in bringing some normality back to what had become an hysterical witch-hunt.

Understandably, the shift in mood has been quickly spotted by Vince Cable, who as Secretary of State for Business, came under the most criticism. Last week, in a newspaper article he said that those who had fallen over themselves to slam the Royal Mail flotation a year ago are “having to think again”.

He rightly reminded people that at the time of the sale he had attributed the surge in the share price as speculative “froth” in the market and argued, to much derision from scores of commentators, that a more realistic price would emerge “in three to six months, or perhaps a year”.

Cable is right to be hitting back at his detractors. As he points out, the purpose of the sale, pursued without success by successive governments over three decades, was to turn Royal Mail into a commercial operation so it could deliver mail everywhere for the price of a standard stamp. This was undoubtedly achieved.

It also worth remembering that the privatisation was an intensely political affair from the beginning, with interested parties including the Royal Mail staff (who each got over £2,000-worth of shares), the trade unions who opposed the sell-off, the private individuals who applied for shares in their hundreds
of thousands, the institutional investors in the City, the customers and, of course, the taxpayers.

Yes, the shares popped more than you might have wanted them to, but then they were tightly held among the institutions that had helped to make sure the float got away at a time when global markets were jittery. This helped to create an illiquid market.

If the shares had been overpriced, then retail investors and Royal Mail employees would have been nursing losses and the Government would have come under just as much criticism.

Twelve months later, it turns out the price is close to where it floated at and as another City expert pointed out this week: “The business is stable, the share price still trades at a premium, industrial relations is not an issue, the business is generating cash and has paid its first dividend.” There are problems ahead, he says, “but the first year has been an achievement.”

So, whisper it ever so carefully, and perhaps duck as you do, but maybe the Government and those crafty investment bankers got it right after all.