It cannot be denied that the shares were underpriced at 330p, given that they soared 38 per cent on the first day of trading. But blaming the government alone echoes the singling out of bankers for criticism when an army of advisers and other stakeholders were complicit in the crisis that engulfed them.
Following a critical report on the Royal Mail privatisation from the National Audit Office last week, Business Secretary Vince Cable and minister Michael Fallon, were forced to defend their decisions and the process they went through.
Their case rests on the advice they received from City institutions, mainly those who were potential buyers, and enough of them refused to buy at a higher price to persuade Cable and Fallon that they had to go for the lower option.
But were the institutions being too cautious and building in too many fears about the potential threat to profits from industrial action and the cost of further modernisation of the business? Worse still, were they pulling wool over the eyes of ministers who were prepared to hand them a nice little earner?
Cable has stuck by his claim made after last year’s first-day leap that there is “an enormous amount of froth in the aftermath of a big IPO [initial public offering]”. What matters, he said at the time, “is where the price eventually settles and if we look back on this in three months or six months’ time … that’s what we are really interested in.”
Well, it is now six months since the flotation and Royal Mail shares are priced at 549.50p. Furthermore, some of the “long-term” investors who bought them have already sold large holdings. They clearly saw a gift horse galloping towards them.
But while there were warnings at the time against undervaluing Royal Mail, no-one could have predicted with any certainty that they would continue to trade at such a premium to the offer price.
Fallon was also correct in stating that the premium achieved on this share issue was little different to that of some other privatisations. In 1984, BT shares rose from 130p to 170p on day one and within a year were trading at 240p. Severn Trent was floated at 240p in 1989 and is now worth 1,733p.
Let’s be fair, no-one invests in the stock market to lose money and it is important to price the shares in expectation of them going up. That means offering them at a discount.
The taxpayer may have “lost” £1 billion in Royal Mail, but thousands of those taxpayers who chose to buy the shares – including Royal Mail employees – are sharing in the stock’s success.
That said, Cable must be privately regretting selling 60 per cent of the company at 330p. Selling smaller tranches would have been far wiser. Now that the government’s six-month lock-in period is up he must decide whether to sell its remaining 30 per cent stake.
If he thinks the price is still full of froth then he must expect it to fall, which means he would be crazy not to sell as soon as he can find a willing buyer.