Anthony Hilton: MPs’ posturing about ‘underpriced’ RM

[TrueBlueTerrier]

Anthony Hilton: MPs’ posturing about ‘underpriced’ Royal Mail share sale is all a bit rich

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There is something absurd about posturing MPs pretending to be upset that the Royal Mail share sale was underpriced and that taxpayers have been massively short changed as a result. Where were these same MPs when it mattered and the taxpayer really was stuffed over Royal Mail?

That was 18 months ago when George Osborne agreed that the state should take responsibility for the Royal Mail pension scheme and with it responsibility for meeting the cost of that fund’s massive deficit. There was no national or economic reason for him to do this; just politics. He did it because he wanted to privatise the Royal Mail, but there was absolutely no chance of anyone wanting to buy it as long as it had the deficit round its neck and was paying £300m a year in special levies to try and bring it under control.

Compared to any profit foregone on last week’s share issue, those pension figures really are breath-taking. As Mr Osborne announced in the April 2012 budget – not in Parliament but in the small print of the documents published at the same time – the deficit was £9.5bn. The scheme consisted of £28bn of assets which he commandeered to bolster his claim that he was on target in his bid to reduce the country’s borrowings, and £37.5bn of liabilities – and it is that £37.5bn for future pensions which taxpayers will now have to pay.

So what Mr Osborne did was take a £9.5bn hit so he could sell the business for £2.5bn – which tells you all you need to know about how his economics is driven by his politics. But barely an MP raised a murmur; there were no demands for a select committee inquiry; and none of them got up early to go on breakfast television to explain what it meant for the taxpayer.

Finally, much as I hate to say this, I don’t think we should be too hard on the investment bankers who advised on the float. There is almost no one still around who worked on the last privatisations 20 or more years ago and the current lot simply did not understand what would happen to demand if the public enthusiasm was rekindled, which in this case it most certainly was.

That, however, was not something which could be predicted in advance, and although in theory the business now has a price of getting on for £1bn more than when it was offered, it does not follow that it could have been sold at that price in the first place.

If people sense a bargain they will open their wallets and then the thrill of the chase sucks them in to chase the price higher. But if something looks a bit costly to start with you don’t get that effect, you don’t get the excitement and you risk the offer languishing neglected and undersubscribed. Then you really have to under-price it to stir up anyone’s interest and it still takes years for the stigma of failure to lift from the business. So there are real downside risks for being too greedy.

That risk has been avoided and the fact the shares have gone well should help people think positively about Royal Mail, boost staff morale and make them feel like winners for the first time in a very long time. If that happens the few hundred millions pounds forgone at the time of the sale will come to be seen as money well spent.

[ronpetetrevchris]

That risk has been avoided and the fact the shares have gone well should help people think positively about Royal Mail, boost staff morale and make them feel like winners for the first time in a very long time. If that happens the few hundred millions pounds forgone at the time of the sale will come to be seen as money well spent.

These people are idiots!

[Brain Fury]

Good article - political opportunism by the Labour Party who commissioned and accepted the original Hutton Report and were happy to sell a minority share of RM to fund election "bribes".

Similarly there is lots of moaning after the event about RM being underpriced but how many were saying it before the sale when the price band was announced? I also saw plenty of threads on here suggesting that it might be hard to find buyers. What would all these people be saying if the IPO had not "got away"?

[nataddick]

The solution to avoid massive under-pricing could have been to sell the business in smaller tranches - say one at 40% (inc staff 10%) and then 2 more at 30%. Maybe 4 lots of 25%.

I accept that Royal Mail is a unique business and that determining the float price was always going to be difficult but the Government paid around £20 million in fees to Goldman Sach and UBS for their expertise in this area.

Surely, the Government could have sold a minority stake to start with and thereby 'test the water' and then prepared a timetable to dispose of it's remaining shares. This way they could have sold their stake in the business based on an 'average price' and thus gained better value for money for the taxpayer. The second and final tranches could have been sold AFTER the current industrial relation dispute is over (which it will be one way or the other) and the business is making even more profit through a reduction in annual pension contributions and zero Corporation Tax.

The sale and the timing have both been politicaly motivated and the disastrous results for all parties (except the Con/Dem politicians and their Banker buddies) are plain to see.