MORE than 500 investment firms lost out in their bid to buy Royal Mail shares. Why this institutional interest?
One explanation is the low offer price. When analysts at Panmure Gordon predicted the stock would hit 450p, Vince Cable said this was “way out”. That benchmark was breeched in the first hours of trading. Even though the price fell back, it stayed a comfortable pound above the 330p offer level. There is now City talk of a £10 billion valuation – three times the flotation figure.
It was obvious the government would favour small investors in the initial allocation.
However, we can expect the institutional big boys to corner most of the shares in the medium run – par for the course with most privatisations. On yesterday’s share performance, Royal Mail could be eligible to join the FTSE 100 at its December review. That should foster continuing interest from the funds, which invest in FTSE stock as a market tracker.
Yet even assuming a rising value, Royal Mail carries risks. The company faces formidable problems: probable industrial action, a lack of development capital (all that investor cash went to the Chancellor), and strong competitors in hovering in the wings.
Fund managers are betting on the fact that the mail delivery business is growing on the back of the explosion in e-commerce. Letter traffic may be down but a new product has entered the mail game – “small packets”. This refers to a small parcel containing goods ordered online that can be hand delivered to impatient consumers.
Existing private delivery firms such as TNT Post lack the infrastructure to handle small parcels in volume – their business model is based on big parcels dispatched by truck. But Royal Mail can take advantage of the door-to-door system it has built up for letters.
However, TNT Post, owned by the Dutch mail group PostNL, wants to introduce doorstep delivery across the UK in the next five years. That gives Royal Mail a very short window of opportunity. Plus there is a danger Royal Mail buckles to media and union pressure following the under-pricing of its floatation and sells its services too cheaply. Then what happens to the share price?
Rare victory for women at banking’s top table
THE real news from the States is not the budget tussle but the nomination of Janet Yellen to run the Federal Reserve, the US central bank. She joins Elvira Nabiullina, new head of Russia’s central bank, as a rare woman at the global financial top table.
Rarely has a Fed boss been better qualified. Yellen co-authored the paper that won her husband, George Akerlof, a Nobel Prize. In 2007 Yellen called the sub-prime housing bubble and its threat to the banking system. Sadly, the Fed ignored her warning.
Assuming Congress approves her nomination, expect Yellen to keep US monetary policy loose for a protracted period. America’s labour participation rate has sunk to an alarming 63 per cent of the adult population, implying massive disguised unemployment and hence no threat of inflation.
The Fed may still taper its monthly bond purchases because the markets don’t need support anymore. Better that Yellen pumps newly printed dollars directly into the American economy to boost consumption.
PS: this year’s Nobel Prize for economics is announced on Monday. Of the 71 existing winners, only one is female.