The Privatisation of Royal Mail
1 Apr 2014 10:47 AM
Full report: The Privatisation of
Royal Mail
By
floating Royal Mail on the Stock Exchange within this Parliament, the
Government achieved its primary objective, according to the National Audit
Office.
The
spending watchdog considers, however, that the Department for Business,
Innovation and Skills took a cautious approach to a number of issues which
together resulted in the shares being priced at a level substantially below
that at which they started trading. On the first day of trading, Royal
Mail’s shares closed at 455 pence, 38 per cent higher than their sale
price. This represented a first day increase in value of £750 million for
the new shareholders. Five months later, the shares were worth 72 per cent more
than the sale price and have traded in the range of 455 pence to 615
pence.
Today’s report recognizes that, following
substantial intervention by the Department, Royal Mail is now a profitable
commercial business with access to private capital and intends to reward its
shareholders with dividends. It is now less likely that the taxpayer will have
to provide public support for the universal postal service.
The
NAO concludes, however, that the Department could have achieved better value
for the taxpayer. It conceded price tension for certainty that the transaction
would be completed, by setting a cautious low end of the price range (260
pence). This was to achieve the Department’s priority to complete a sale
within the time available, against the risks of industrial action and
short-term market uncertainty; and to reflect the price indications of a small
number of priority investors whose participation was seen as vital, as well the
views of over 500 other potential investors.
The
banking syndicate used a ‘book-building’ process (to generate
demand for shares and determine the price in the market for shares). Demand for
shares was 24 times the maximum number available to institutional investors but
the Department encountered the inherent limitations of the book building
process which meant it did not know how much demand for shares existed at
prices above the high end of the range set by the Department (330 pence).
The Department was advised that the book building had not revealed sufficient
demand at meaningfully higher prices and therefore judged that the risks and
practical difficulties of raising the price were too great.
A
small number of priority investors were allocated a larger proportion of their
orders than other investors to reflect the Department’s expectation that
the priority investors would form part of a stable, long-term and supportive
shareholder base. However, almost half of the shares allocated to them had been
sold at a substantial profit within a few weeks of the stock market
launch.
According to today’s report, the Department has
benefited from the increase in the share price via the 30 per cent of the
shares that it has retained. However, on the advice of its advisers, it
decided to sell the full 60 per cent of shares available for sale. It could
have retained 110 million more shares worth £363 million at the offer
price, while still achieving the policy objective of reducing the
government’s ownership to below 50 per cent.
Although three surplus properties with a market value of
more than £200 million were disclosed in the prospectus, the NAO does not
believe that the basis on which Royal Mail was sold recovered this
value.
“The Department was very keen to achieve
its objective of selling Royal Mail, and was successful in getting the company
listed on the FTSE 100. Its approach, however, was marked by deep caution, the
price of which was borne by the taxpayer. The Government retained 30 per cent
of the company. It could have retained even more and allowed the taxpayer to
participate further in the rapidly increasing share price and thus limit the
cost of to the taxpayer of its cautious
approach.”
Amyas Morse, head of the National Audit Office,
1 April 2014
Notes for
Editors
£1,980m
Cash proceeds for government’s 60 per cent stake
sale
£1,704m
Value of government’s remaining 30 per cent
stake
38 per cent
Increase in Royal Mail share price on the first day of
trading
24 times
Number of times by which that the share offer was
oversubscribed by institutions
£334 million
Free cash flow generated by Royal Mail in
2012-13
167,000
Royal Mail’s employees who were given 10 per cent
of the shares
690,000
Retail investors bought shares
72 per cent
Increase in Royal Mail share price over the first five
months of trading
60 pence
Cost of a first class stamp at the date of the sale, an
increase of 30 per cent in 2012-13
1.
Press notices and reports are available from the date of publication on the NAO
website, which is at www.nao.org.uk. Hard copies can be obtained by using the
relevant links on our website.
2.
The National Audit Office scrutinises public spending for Parliament and is
independent of government. The Comptroller and Auditor General (C&AG),
Amyas Morse, is an Officer of the House of Commons and leads the NAO, which
employs some 860 staff. The C&AG certifies the accounts of all government
departments and many other public sector bodies. He has statutory authority to
examine and report to Parliament on whether departments and the bodies they
fund have used their resources efficiently, effectively, and with economy. Our
studies evaluate the value for money of public spending, nationally and
locally. Our recommendations and reports on good practice help government
improve public services, and our work led to audited savings of almost
£1.2 billion in 2012.
Contact:
Barry
Lester
Direct line: 020 7798
7937
Email:
pressoffice@nao.gsi.gov.uk