Royal Mail 'underpriced, two investment banks warned'

Post box outside a Royal Mail building Two banks warned Royal Mail was underpriced ahead of sale

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The government ignored two banks that valued Royal Mail at £5bn, far more than shares were sold for, the Financial Times has reported.

The government sold 60% of the postal service last week for £3.30 per share, but they soon passed £5.

The FT said at least two banks had said shares would be worth up to £5 each.

The government said banks' estimates had been made long before fresh factors arose, such as strike threats and financial uncertainty in the US.

Strike threat

The government sought opinion from investment banks bidding to manage the sale, and selected Lazard as its independent adviser, before deciding to dispose of 60% of Royal Mail at an Initial Public Offering (IPO) price of £3.3bn.

Start Quote

Let's look at the share price in six months' time when the froth has gone away”

End Quote MP Nadhim Zahawi Business select committee member

Goldman Sachs, Barclays, Bank of America Merill Lynch and UBS were appointed to lead the sale.

Lazard has now been called in by the Commons Business, Innovation and Skills (BIS) select committee to answer questions on the pricing after shares had hit 508.3p, before closing at 502.5p.

In a statement, a Department for Business, Innovation and Skills spokesman said seven of the 21 banks that pitched in May to act for the government on the sale of Royal Mail were successful.

"The proposals included indicative valuations of the company based, in many instances, solely on information already in the public domain," he said.

"Banks made their own assumptions of Royal Mail future performance.

"The range was wide with the median around £3.6 billion taking into account IPO [initial public offering] discount. The banks appointment process was overseen by Lazard as independent advisers to government.

He added: "The banks' proposals came months before any threat of strike action by the unions, financial market uncertainty in the United States and other factors which the government has already said were taken into consideration in setting a price for the company in September."

Initial Spike

Business select committee member Nadhim Zahawi said he believed the government had got its sums right.

Conservative MP Mr Zahawi said he thought the government had acted wisely, given the risks of a flotation.

Analysis

Royal Mail has only ever had one owner - HM Government. So establishing how much it's worth could only ever be an art rather than a science.

Investment banks who ventured an opinion earlier this year had to work out much parcel sales at RM would grow and at what rate delivered letters would continue to fall.

They also had to guess about just how resolute the company's trade unions (CWU) would be about industrial action - not just now but also years into the future.

Add in the fact that the government had to undervalue RM anyway in order for prices to rise once it floated and you've got a swirl of financial and political noise which distorts the whole valuation picture.

That two investment banks (who didn't ultimately get the job of floating the company) felt that RM was worth £5bn last June doesn't mean they are great seers or prognosticators. It may be that they had a crate of sour grapes which they now want to deliver (via their local postie) to Vince Cable's door.

He told the BBC News Channel: "The right thing to do is to bring in as many banks as possible. Ones that work closely with the Royal Mail, ones that advise the government.

"When you are trying to get a placing that large away, what you don't want is egg on your face if it doesn't get the investment community excited."

He added: "It feels to me that this story is a bit of sour grapes from a couple of banks who weren't very close to the business.

"The problem to remember as well is that the government still has a substantial shareholding that at some stage it will want to sell down."

Mr Zahawi warned of the danger that could be posed should the government face the prospect of selling its remaining stake at below the launch price and that it would be "far more negative than a successful IPO with shares going up".

It was common practice to see government sell-offs priced at around 20% below full value so early investors are not penalised.

He said: "Let's look at the share price in six months' time when the froth has gone away when you take out the initial spike and where the shares settle. When you look at comparators ie on dividend on yield on profitability, I think the price was just about right."

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