Royal Mail share price: it was too low, the NAO says

Vince Cable is in trouble: not only has an official investigation decided that he priced Royal Mail too low, but the 'long term investors' he chose have sold off their stakes...

by Emma Haslett
Last Updated: 01 Apr 2014

Ordinarily, if a company’s shares rise after it lists, everyone’s very pleased. But such is the perverse nature of government privatisation that not only is no one particularly happy about the fact Royal Mail shares are currently at 563p, 71% above the original asking price of 330p, but the National Audit Office has now published an investigation into it. Spoiler: it doesn’t look good for Vince Cable.

The NAO’s first accusation is that shares were priced far too low. No kidding: on the first day of trading, shares closed at 455p - that’s an increase in value of £750m for shareholders. In January, share price peaked at 615p before dipping slightly.

According to the NAO, a better strategy would have been to have sold less of the company (51% rather than 70%), which would have allowed it to sell off more another time, when share prices were higher. But apparently such was the government’s determination to sell off the shares (and the implication here is that Cable was rushing to get it over with well before the election) that it didn’t even investigate whether there was any demand for shares above the 260-330p range set by the government.

The second point the report made was Cable’s reliance on ‘long-term investors’. Remember the furore when no one could get hold of shares because most of them (£728m worth) had gone to 16 ‘priority’ institutional investors? Cable explained it by saying they would be long-term, reliable shareholders who would ensure ‘stable’ ownership of Royal Mail.

But alas: most of those investors have sold off their shares now. You can’t really blame them: with prices rising that fast, it was easy money.

One interesting implication is that it looks like the traditional ‘long-only’ institutions are beginning to behave more like hedge fund bad boys: barging in, buying shares at a low price, selling them off at a high price and then driving off in their souped-up Vauxhall Nova. The government shouldn’t rely on them as much during future privatisations. When the RBS sale (eventually) goes ahead, us retail investors might actually be able to get our hands on a slice.

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