Royal Mail Group Ltd., Britain’s 360-year-old postal service, closed 38 percent higher on its trading debut, heightening criticism of an initial public offering that opposition politicians say was underpriced.
Royal Mail shares, sold to investors for 330 pence in the U.K.’s biggest state asset sale since British Rail was broken up in the 1990s, rose as much as 39 percent to 459.75 pence and ended the day up 125 pence at 455 pence in London, valuing the company at 4.55 billion pounds ($7.3 billion).
The allocation of Royal Mail shares to institutions, which bid for more than 20 times the number available, was cut yesterday to meet higher-than-expected demand from individuals. Business Secretary Vince Cable said today that the price surge doesn’t mean an IPO which raised 1.7 billion pounds for state coffers had been undersold or mismanaged.
“You get an enormous amount of froth and speculation in the aftermath of a big IPO of this kind,” Cable said on BBC Radio 4. “It’s of absolutely no significance whatever. What matters is where the price eventually settles.”
The level of demand has led Britain’s opposition Labour Party, which wanted Royal Mail kept in state hands, to query the sale’s handling, with business spokesman Chuka Umunna predicting taxpayers would get “massively short-changed” while adding today that he’ll judge the IPO in three months. Lawmaker Katy Clark said after the share gain that it should have been pulled.
“The government was warned that this sale was undervalued and the news today suggests that this was the case,” said Clark, who sits on the House of Commons’ Business, Innovation and Skills committee, which cross-examined Cable this week. “They should not have gone ahead on this basis.”
Gray-market trading earlier this week suggested Royal Mail (RYE) stock would rise at least 20 percent, based on figures from London-based spread-betting company IG.
Some 102 million shares traded in the first hour today, versus 6.2 million for wireless phone carrier Vodafone Group Plc, the second-largest company on Britain’s benchmark FTSE 100 index, and almost 228 million had changed hands by the close.
Graham Simpson, an analyst at Canaccord Genuity Ltd. in London, said there is still “plenty of upside to go,” citing the company’s Quest cash-flow valuation model as suggesting Royal Mail shares are worth 599 pence apiece.
Fidelity, Standard Life
Cable added on the BBC that the aim had been to secure committed shareholders. About 90 percent of the institutional allocation was placed with long-term investors such as pension funds and life insurance companies, with about 10 percent going to hedge funds, and the majority of institutional orders -- 500 out of about 800 -- received no shares at all.
Among successful subscribers were Threadneedle Investments UK, Fidelity, Blackrock Inc. and Standard Life Plc. (SL/)
The institutional allocation was cut to 67 percent from the planned 70 percent, the government said yesterday, with small investors getting 33 percent of the issue, up from 30 percent, after the stock assigned to them was seven times oversubscribed.
Royal Mail will pay investors a dividend of 133 million pounds in July, the government said, and a notional full-year dividend of 200 million pounds, which translates into a 6.1 percent dividend yield for 2014.
All individuals who applied for 10,000 pounds or less of shares -- more than 690,000 people -- received an allocation of 227 shares, equivalent to 749.10 pounds at the maximum offer price of 330 pence. Those who applied for more than 10,000 pounds got nothing.
Out of the company’s 150,000 staff, 371 have opted not to receive free shares in the company, Cable said Oct. 9, though the main Communication Workers Union opposes the selloff.
“Shares will make no scintilla of difference to postal workers who are far more concerned about their jobs,” General Secretary Billy Hayes said in a statement. Some staff protested outside the London Stock Exchange today, he said, adding that union members will vote on taking strike action next week.
Royal Mail is the largest IPO in Europe since April 2011, when Glencore Xstrata Plc (GLEN) raised $10 billion in its London listing, according to data compiled by Bloomberg. The volume of initial offerings in the region rose sixfold last quarter, as investors returned on the back of strengthening economies.
The sale of Royal Mail, which has refocused on package-delivery markets spurred by a trend toward web-based purchasing, opened Sept. 27 and was fully subscribed within hours.
Bookrunners for the IPO were Goldman Sachs Group Inc., UBS AG, Barclays Plc and Merrill Lynch & Co., with Investec Ltd., Nomura Bank International Plc and RBC Europe Ltd. as lead managers, while the government is being advised by Lazard Ltd. (LAZ)
The investment banks managing the sale will be paid 10.3 million pounds in fees, including commissions and expenses, the government said.