Bill Jamieson: We’ve got Mail, but at what price?

There seems to be faith that Royal Mail will be a successful company, traded on the Stock Exchange. Picture: Getty

Something never seemed quite right about the Royal Mail privatisation. It was – and remains – in the minds of many, a step too far. The sale to private owners of a business that is a universal and historic public service seems too critical a public utility to be anything other than government owned.

But by the end of this week, and against a relentless caterwauling of imprecations, dire warnings and threats, the offer for sale of shares will have been hailed as a resounding success. The issue has been heavily oversubscribed.

Tens of thousands of members of the public who subscribed are unlikely to get all the shares they applied for. What a contrast to the widespread view barely a month ago that the issue would be shunned and unsold shares dumped with luckless underwriters.

But it is not the level of over-subscription that will surprise many. What really catches the eye is that 99.75 per cent of Royal Mail staff have accepted the offer. Just 368 staff chose not to accept.

Members of the Communication Workers Union (CWU) are voting on whether to strike over the government’s privatisation plan. The ballot closes on 16 October and strike action could begin as early as 23 October. Such an overwhelming acceptance will, the government hopes, undermine the threat of sustained strike action.

And all this poses a problem for the SNP administration. Is its pledge to take the Scottish operations of Royal Mail back into public ownership really quite as populist as it first seemed?

Now there is a simple explanation of what has happened here. And many will seize on it. The issue of shares was priced too cheaply. Does not the response to the offer prove as much?

Labour’s Chuka Umunna has asserted that the sale is “short-changing” taxpayers, while providing a windfall for those devils incarnate – hedge funds and professional investors.

As for the staff response, it could hardly have been otherwise, given that the shares were being offered free, and that they had been deliberately opted-in to the share scheme, so those wishing to reject the offer had to fill out a lengthy form.

So the response proves nothing – other than the desperation of the government to get Royal Mail off its hands ahead of the election and use the proceeds to bring down the budget deficit.

But the response to the offer cannot be dismissed so lightly. It was fraught with risk – financial and political. Almost from the start it has been dogged by threats of industrial action and warnings that the public had no appetite for it. The staff, we were told, were vehemently opposed. Workers would shun the offer of shares totalling 10 per cent of the equity.

There were big doubts over the group’s loss-making past, its business model and concerns that a key source of revenue – revenues from letter deliveries – was in steep and relentless decline. The business has also to meet commitments on universal service provision – maintaining a postal delivery service in rural areas whether or not it is economic to do so. For these reasons many financial advisers have been cautious about this sale and have said it was too risky to take up.

Then, barely two weeks ago, came the declaration from Scotland’s First Minister Alex Salmond that an SNP government in the event of a Yes vote in the independence referendum would renationalise the Scottish operations of Royal Mail.

Who dared to subscribe for the shares given all this?

Whatever indicative price range was given would need to reflect all those risks and negatives. And the more dire the warnings, the greater the need to construct an offer that would appeal to buyers above the cacophony of naysayers. If shares in Royal Mail have been priced too low, critics of the sale have to bear a share of responsibility for that.

It is always a difficult judgment for the government to strike a balance between maximising the proceeds of a share sale for taxpayers and at the same time ensuring that the issue is attractive enough to encourage prospective buyers to come forward.

The price will be struck between 260p and 330p, with latest indicators suggesting that the exact price will be at or near the top of this range. Investors have been asked to commit a minimum of £750 and accept whatever price that is determined within that range.

Is the heavy subscription simply a scramble to make a quick buck? Undoubtedly some will have been attracted for this reason. But arguably the strongest attraction for the public is the dividend yield. In this era of near rock-bottom interest rates, this looks particularly appealing, coming in at 6.1 per cent to 7.7 per cent, depending on the eventual price struck: an incentive to hold the shares for the longer term.

But dividends, of course, are not guaranteed. They are a function of revenues. And revenues depend on this business making a clean break from its loss-making past and achieving progress on productivity and efficiency gains.

There is always a risk in equity shares. And in this case it is the risk of Royal Mail failing to achieve this transformation that investors have to accept in return for that attractive-looking yield and a trading record that, at best, has been problematic.

The 10 per cent share offer to staff is not to be sneezed at. My personal reservation is that the Royal Mail did not go further down the route of employee share ownership to emulate the early success of the National Freight Consortium employee buy-out in the early 1980s. This wrought a transformation in labour relations, productivity and profits and in the early years saw quarterly shareholder meetings round the country attracting thousands of enthusiastic employee investors, led by the inspirational Peter Thompson. Privatisation needs exactly this degree of popular commitment and support to redress the excesses of fat cat utility director bonuses and short-termism that besmirched the later sell-offs.

However, here we are, on the cusp of another paradox of our time: loud and unnerving political opposition to this sale but, despite this, a strong expression of private faith that Royal Mail can be a strong, profitable and successful company with its shares traded on the Stock Exchange.

Most private investors will not know how many shares they have been allocated until after unconditional market trading starts next week. Tens of thousands will be eagerly awaiting a Royal Mail letter telling them how many shares they have been allocated. And for those who did not apply, there is the consolation that their pension fund savings may be just that little bit bigger and our mountain of public debt a little bit lower than it would otherwise have been.

If Royal Mail rewards investor confidence, this share sale may prove rather more difficult to reverse than the unions and Alex Salmond appear to think.

The Scotsman Conferences is hosting a series of events capturing the many facets of the Scottish independence debate. 3 December sees a formidable line up of expert speakers tackle “The Independence White Paper: A Business Plan for Scotland?” For more details on this and other great events please visit www.scotsmanconferences.com