Investment bankers defend Royal Mail’s flotation price

Shares in Royal Mail have rocketed by up to 80 per cent since the privatisation. Picture: PA
Shares in Royal Mail have rocketed by up to 80 per cent since the privatisation. Picture: PA
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CITY advisers to the UK government’s privatisation of Royal Mail yesterday hit back at critics who had alleged that they sold one of the remaining state-owned crown jewels on the cheap.

Shares in Royal Mail have rocketed by up to 80 per cent since the privatisation, sparking claims by trade unions and opposition politicians that the float was under-priced for a politically expedient sale.

But directors from investment banking giants Goldman Sachs and UBS, which advised Whitehall, told MPs on the business select committee that market uncertainty and the float’s complexity contributed to a conservative £3.3 billion valuation.

Richard Cormack, co-head of equity capital markets at Goldman, defended the float as a “well-executed transaction” and that the postal service could not have been sold at the dizzying levels the share price has reached.

The shares closed flat yesterday at 550p, but have traded as high as 650p recently, compared with a listing price of 330p.

Cormack said: “Based on all the analysis we did at the time, 330p was the price we could achieve for the amount of shares that we were selling.”

He added that the average daily trading volume of these shares now was a much lower 1.3 million compared with the 600 million placed at the initial public offering (IPO).

“I don’t think today’s price is indicative of where we could have placed 600 million shares,” Cormack said.

James Robertson, a managing director at UBS, said that the lead banks to the share offer had at one point looked at urging the government to increase the top end of the share price range by 20p.

But a looming threat of industrial action by Royal Mail staff and the possibility of a major American budget default that might inject volatility into financial markets meant the idea was dropped. However, Brian Binley MP lambasted the float advisers, accusing them of doing a bad job and running an exclusive “cult of the high priest”.

Also before the committee were Citibank, Deutsche Bank, JP Morgan and Panmure Gordon, firms that did not work directly on the IPO but gave the UK government valuations for Royal Mail ranging from £3.7bn up to £8.5bn.

Gert Zonneveld, co-head of research at Panmure Gordon, said he had warned the mooted valuation was too low, but had been branded an “outlier” by Business Secretary Vince Cable.

Ben Storey, UK investment banking head at Citibank, claimed it was “incompatible” to compare the much higher Royal Mail valuations with the eventual lower price due to the lack of detailed business information available to them.

UBS told MPs the differing valuations also depended on how each bank or broker viewed risks linked to Royal Mail. These included having no proven track record of profit, facing rising competition in a deregulated postal market, and the size of its pension fund.

Billy Hayes, general secretary at the Communication Workers’ Union, said: “It’s clear from the select committee Royal Mail was undervalued and the UK government and taxpayer were misled.”

The union boss claimed the array of Square Mile advisers provided “shoddy advice” that meant the taxpayer losing out on hundreds of millions of pounds.