Comment: Why price is right for Royal Mail sell-off
Labour leader Ed Miliband and his shadow cabinet chums have been decrying the process as ideologically-driven with the end result being a bargain basement sale. He either has a short memory, or a selective one. Peter Mandelson, the business secretary in the last Labour government, tried to sell a stake in the postal service in 2009.
In fairness to both, Mandelson’s plan involved selling just 30 per cent as opposed to the 60 per cent being offloaded by the coalition. He also referred to his plan as a “partnership” with the private sector which would have left majority ownership in public hands.
However, this was just a convenient cover for what was a part-privatisation. Both Labour and the Tory-Lib Dem coalition were agreed on the need to inject more money into Royal Mail from the private sector and once this precedent was set it was inevitable that further funds would come from the same source.
Both agreed that the heavily-indebted pension scheme would have to be taken on to the government’s books in order to entice investors who would otherwise run a mile. It is worth noting, amid the party political mud-slinging, that one firm opponent to privatising the Royal Mail was none other than Lady Thatcher whom former Tory minister Ken Clarke failed to talk into selling it.
The debate has at least moved on and the deed has been done. The argument now is not so much about ideology or dogma as one concerning the price offered.
Royal Mail shares soared by 38 per cent on Friday to close at 455p, making it the biggest first-day trading premium for a privatisation issue. It meant the government could have made up to £750 million more than the £2 billion it raised by selling the shares at 330p.
Even so, some mischief is being peddled. Criticism that the Royal Mail has been sold too cheaply is missing the point. All privatisations have been discounted. So are company rights issues – the process of selling more shares to existing shareholders.
Like any bargain offer, discounting an issue is a way to attract buyers and ensure it is a success. Underwriters do not want to be left with a bill for mopping up unwanted shares. Institutions made it clear that if Royal Mail shares had been pitched at the price they reached on Friday they would not have bought them. Why would any canny investor buy at the top of the market? If it is accepted that we have a capitalist society and that making a profit is part of that system then it is irrational to complain when someone does so.
The share price is likely to rise again this week with some predicting it could go as high as 600p, valuing the company at £10bn.
Of course, there is no guarantee that the price will head in only one direction and when the sellers do take their profits the price will fall. Private investors, particularly first-timers, should heed the warning that share prices can go down as well as up.
Homecoming for striding man
What is Scotland’s biggest brand? A long list would surely include Irn-Bru, Walkers Shortbread, the Old Course at St Andrews, Celtic and Rangers.
Arguably it is Johnnie Walker, the biggest-selling Scotch whisky in the world – and the most popular is Red Label.
Ironically, Johnnie Walker’s sale in its home market is hardly worthy of a toast. One source ranks it as 58th in Scotland’s on-trade sales.
Drinks giant Diageo, which owns the brand, is now planning a £7.2m marketing campaign to promote Red Label in the UK and it will feature in television advertising for the first time since the 1960s.
This is long overdue. In a vox pop conducted by this newspaper in 2007 some Scots even thought Johnnie Walker was a US brand. It was also at a time when Tennessee-distilled Jack Daniel’s was being heavily promoted in the UK.
The controversial closure of the Kilmarnock facility did not help the image of either Johnnie Walker or Diageo in Scotland, but its popularity abroad is unrivalled. More than 130 countries were selling Johnnie Walker before Coca-Cola got out of Atlanta.
Yet poor sales of home produce in home markets is not unusual. Hennessy Cognac struggled to sell in France. There is a certain cachet about buying foreign brands over home-made ones. Diageo hopes to put that right.