Fear of failure stalked the Royal Mail sale
- 11 July 2014
- From the section Business
Last month the analyst and former Goldman Sachs employee, Louise Cooper, made a speech entitled the City is from Mars and politicians are from Venus.
With a nod to John Gray's best-selling tome dealing with men and women, Ms Cooper argued that the worlds of finance and Westminster were unlikely ever to be comfortable bed-fellows.
The two sides speak different languages.
Mars and Venus provide a useful planetary prism through which to view the latest salvo of allegations about the Royal Mail float price.
What is clear is that the initial offer price of 330p was certainly low. Any number that "pops" - goes up - 38% on the first day reveals that.
The question is: why? And what should be done about it?
On the 'why' there are two major reasons.
The government was a cautious seller - the opposite of the normal course of events in initial public offerings where the seller is looking for the highest price possible and incentivises its advisers to achieve that goal.
That's what the City is used to - but the coalition wanted something different.
You can see why. Attempts to sell the Royal Mail had been made before - and failed. A decade ago the business was losing billions of pounds, faced difficult industrial relations and had an eye-watering pension deficit.
Would institutional investors really trust that all these problems had been cleaned up?
The second reason was a miscalculation on demand. This was a big sale - 600 million shares valued at over £3bn with a significant proportion going to individual retail investors as well as Royal Mail staff.
Would the government get such a huge jumbo jet off the ground?
Both these factors came together to set a "price to go" - a deliberate discount to ensure a successful sale.
The discount may have been too great - but it is possible to understand the thinking. One thing worse than a share price flying upwards is it going in the opposite direction.
So, what should be done?
In a move to head off criticism (and the government very conveniently announced this two days before the critical select committee report) the government has ordered a review of the sale process for public assets.
It will be undertaken by Lord Myners, the former City minister who is the King of Reviews. It wasn't that long ago he finished looking into governance arrangements at Co-op Group.
Leading City figures I have spoken have suggested a few areas that might tickle Lord Myners' little grey cells.
The first is whether the government should in future not use advisory banks which also have large and active asset management divisions investing in the shares. Banks with relatively passive investment arms - that is funds that simply follow the market - would be less of a problem.
That could head off any allegations of conflicts of interest and I would not be surprised if the Shareholder Executive (charged with looking after the government's share holdings in public assets) is sympathetic to the idea.
The second is introducing an element of "claw back" into the process. One criticism the business select committee made of the Royal Mail float is that the government under-valued the business' property portfolio.
In the future, that risk could be ameliorated by a claw back provision, meaning the government could receive a cut of any future property sale above the value agreed at the time of the initial public offering.
Again, the Shareholder Executive is likely to want to explore the idea.
Third, when it comes to the sale of public assets, the government could be obliged to execute a small "tester sale" first, to gauge appetite in the market.
This was the way the coalition sold the first tranche of its holding in Lloyds Banking Group, via a "placing" of 6% of the shares with institutional investors.
The share price of Lloyds did subsequently rise, meaning that the government's next sale was at a higher price.
In contrast, the government sold 70% of the Royal Mail in one process.
Ministers were concerned that a lower proportion (let's say under 50%) would leave the share price struggling under what is known as the "overhang" - the negative effect a large minority or majority shareholder has on the overall price.
The coalition wanted to make it clear that it did not want anything approaching a controlling holding as that would discourage asset managers from investing.
This whole debate may become a little academic, of course.
Why? Because pressure on the Royal Mail's share price is probably more downward than upward at the moment.
Concerns about the business' parcels operation (where volumes are flat) and competition from operators such as TNT and UK Mail are making investors nervous.
Share price highs of over 600p at the beginning of the year are now a distant memory. One institutional investor I spoke to said he was very glad to sell out when the price was still well above 550p. It is now around 473p and some believe it will go lower.
Arguments about whether the public "lost out" on £1bn last autumn could look very different in the months ahead.