When Royal Mail listed in October, the cry went up more or less immediately that Vince Cable, the man championing its IPO, had failed to get value for UK taxpayers. Now a committee of MPs has decided the taxpayer lost more than £1bn in profits - a third more than the £750m the National Audit Office suggested back in April.
A report published this morning by the business select committee details the many mistakes made by Vince Cable and Michael Fallon, the duo in charge of the listing, based on ‘poor quality advice’ it was offered by Lazard, Goldman Sachs and UBS (the latter two of which were known collectively as ‘Global Co-ordinators’, or ‘GloCos’. Banter):
1. It ‘under-estimated market value of Royal Mail’
Cable explained that the price range (of 260p-330p - imagine the furore if shares had been any cheaper) had been decided by a process which involved various conversations with institutional investors, looking at market metrics and - weirdly - comparable situations in Belgium and Austria.
The Belgians clearly aren’t as enthusiastic about Le Post as we are about Royal Mail, though: when the government floated 60% of its shares at 330p each, prices almost immediately shot up by 38%, before peaking at 615p. At the time, Cable dismissed it as ‘froth and speculation’ - although shares have since settled at around 40% above offer price, suggesting investors’ interest was a lot more than that:
2. They under-estimated investor interest
The government appointed a group of 16 ‘priority investors’ to ensure there was enough demand and to act as ‘stable, long-term and supportive’ shareholders - ie. not immediately sell off their shares. Of course, some did: Lazard Asset Management, a sister company of one of the government’s advisors, made £8m when it sold off its allocation within days of the listing.
Today’s report quotes April’s investigation by the government’s National Audit Office, which found that while drumming up interest was slow at first, by the time of the listing institutional investors, who were due to get 70% of the shares on offer, wanted 24 times the amount available to them, while retail investors wanted seven times as many.
But Cable said the worry was demand would vanish in a puff of smoke if the government priced shares any higher.
‘The very strong unequivocal advice we received was that, if we had attempted to push the price beyond £3.30… there was a very high possibility that a large number of the people who had hitherto expressed interest would simply walk away from the transaction.’
William Rucker, head of the government’s shareholder executive (the group in charge of the government’s share portfolio) added that ‘Facebook was 25 times oversubscribed - more heavily over-subscribed than Royal Mail - and within three months the share price had fallen 50%’.
So the evidence is that the government was doing everything in its power to ensure the IPO was successful. As Cable himself put it, ‘a failed transaction… would have been a very poor outcome’. Quite.
3. They over-estimated the risk of strike action
As any five-year-old for whom Santa hasn’t turned up on Christmas day will tell you, industrial action is commonplace at Royal Mail. In September the Communication Workers’ Union, angry over pay, warned that it planned to disrupt Royal Mail’s IPO.
‘There is no way of reliably quantifying the financial impact… of any industrial action’, said Royal Mail’s prospectus, while UBS warned that strike action was a ‘major risk factor in respect of the price and the achievability of the deal’.
It clearly had everyone worried. ‘There were some potential investors who stated that they were not willing to invest at all and many others who focused on the business and financial implications of strike action,’ Cable told the select committee, while Fallon said it had become clear from his meetings with the union that ‘there was no prospect of [Royal Mail’s dispute with the union] being settled… before privatisation’.
Full-scale industrial action would cost £30m, the government estimated. ‘After two weeks, the profits of the company would have been wiped out,’ Cable said- although he also admitted this might have been an overreaction. ‘Relatively few’ days have been lost to industrial action over the past two years, he admitted to the select committee.
In the end, workers didn’t manage to disrupt the listing with industrial action and their dispute was settled soon after the IPO - but it looks like the threat of a strike was enough.