Postal company Royal Mail valued at £5bn in June

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Royal Mail was valued by investment banks at up to £5bn in June, 50 per cent more than the price at which the UK postal operator was sold to the public a week ago.

The revelation will intensify criticism of the government’s handling of the controversial flotation. MPs are preparing to grill its main adviser, Lazard, on the conduct of the £3.3bn offering at a hearing next month, in the wake of a public outcry and accusations by the opposition Labour party that a prime state asset has been sold on the cheap.

At least two investment banks pitched a maximum price of about 500p at the beauty parade convened to select the underwriters to the offering. The shares were finally sold to investors at 330p. The postal company’s share price crossed the 500p mark for the first time on Friday. Neither of the banks in question was awarded the mandate.

Government officials said banks had indicated a wide spread of values at the contest, with some coming in below the final price range between 260p and 330p. The higher bids came from banks that were ill informed about the company, they said.

The government ended up appointing four banks to lead roles in the syndicate. Three of those – Goldman Sachs, Barclays and Bank of America Merrill Lynch – had since 2012 been advising Royal Mail’s chief executive Moya Greene and sounding out investors’ appetite for an IPO. The last of the four, UBS, had advised the government on its stake in Royal Mail.

Bankers said valuations presented in beauty parades were often higher than the final selling price. But this could not explain the discrepancy between 500p and 330p, they added. Discounts for large companies tend to be no higher than 20 per cent at most. The banking sources refused to be identified for fear of antagonising the government.

They said the market for public offerings had improved since the summer, especially for companies valued for their yield such as Royal Mail. Yet others suggested that all the Royal Mail valuations were highly speculative given that they did not incorporate the latest data on its financial performance.

In a letter to the Commons business, innovation and skills select committee, Vince Cable sought to rebut accusations that he had botched the sale of 60 per cent of the company.

“Value for money has been central to our strategy as we have taken forward the sale of shares through an initial public offering. Delivering value for money is about more than just the level of proceeds received on day one,” the business secretary wrote.
Mr Cable said the initial price range of £2.6bn-£3.3bn was recommended by Goldman Sachs and UBS, the global co-ordinators of the offer, and endorsed by Lazard, the government’s independent adviser.

There was “rigorous market testing” among high-quality institutions such as pension funds and life insurers, he said.

In September it became clear that the main Royal Mail union would ballot workers for strike action over pay, pensions and job security. As a result, some potential investors had indicated that they would not buy shares. The strike was voted through this week.

Large investors nevertheless bid heavily for the shares, leading to 20 times subscription of the institutional book. One banker said one of his hedge-fund clients had been tipped off by one syndicate bank to apply for 20 times the number of shares it actually wanted.