British taxpayers could have earned a bigger return from the state’s sale of Royal Mail Plc had policy makers pushed the deal more aggressively, the National Audit Office said.
Seeking to lock “priority investors” into the initial public offering, policy makers “took a cautious approach” and accepted lower proceeds in exchange for securing pledges from important stock buyers, the watchdog said in a report published today. Authorities’ actions resulted in Royal Mail shares being “substantially” under-priced on the first day of trading.
Stock in the 360-year-old, London-based postal service jumped 38 percent at the close on its Oct. 11 trading debut, heightening opposition politicians’ criticism of the IPO terms. The state asset sale, the country’s largest since the 1990s, raised 1.98 billion pounds ($3.3 billion) for taxpayers, with the government keeping a 30 percent holding that the audit office said was valued at 1.7 billion pounds as of mid-March.
The state could have retained 110 million shares, worth 363 million pounds at the 330-pence offer price, and still achieved policy objectives, the audit office said.
“It is clear to me the Department for Business, Innovation and Skills undersold the taxpayer when it privatized Royal Mail,” Margaret Hodge, chair of the U.K. Parliament’s Public Accounts Committee, which scrutinizes the audit office’s reports, said in a statement. The department “made a critical error by incentivizing its private advisers to sell the shares on time at the expense of price, effectively setting itself up to fail,” said Hodge, a lawmaker from the opposition Labour Party.
Royal Mail surged more than 70 percent last year, compared with average IPO gains of about 18 percent for companies that listed in Europe in 2013, data compiled by Bloomberg show. In terms of first-day gains for IPOs exceeding $1 billion, Royal Mail was second only to Italian skiwear maker Moncler SpA.
U.K. Business Secretary Vince Cable defended the pricing decision at a November hearing, saying his department relied on the advice of bankers who said institutional investors would have walked away had the government demanded more. At the same hearing, Business Minister Michael Fallon said that threats to strike by the Communication Workers Union in the run-up to the IPO also increased uncertainty about the stock sale’s prospects.
“The National Audit Office’s main finding is that we achieved what we set out to do,” Cable said today in a statement. “We secured the future of the universal postal service through a successful sale of a majority stake in Royal Mail, predominantly to responsible long-term investors,” while “achieving the highest price possible at any cost and whatever the risk was never the aim of the sale.”
The book-building process used by the government’s banking advisers suggested there was insufficient interest for Royal Mail shares above the 330 pence offer price, though demand for shares was 24 times the maximum number available to institutional investors, the audit office said. More than 500 institutions and 55,500 individuals interested in buying Royal Mail shares received nothing, according to the watchdog.
A small number of investors were given a larger portion of shares to reflect authorities’ expectations that they would remain long-term stockholders, the office said.
“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,” the watchdog said.
“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” stock index in the U.K., Amyas Morse, head of the National Audit Office, said in a statement. “Its approach, however, was marked by deep caution, the price of which was borne by the taxpayer.”
U.K. policy makers should consider alternative methods to gauge value in future transactions and try to reduce reliance on professional advisers, the audit office said.
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. The government was advised by Lazard Ltd.’s Lazard & Co. unit. The net cost of the sale to the state was 12.7 million pounds, the audit office said.
“In this instance, the department delegated a wide range of responsibilities to its independent corporate finance adviser and aligned its incentives with the policy objective of achieving a sale,” the watchdog said. “The taxpayer interest was not clearly prioritized within the structure of the independent adviser’s role.”
A pool of 17 priority investors was used to develop a worst-case-scenario price of 250 pence, the report said.
Cable and Fallon said during their testimony in November that there were a wide range of views among analysts on Royal Mail’s value, with some predicting the shares would fall below the offer price. The range of analyst estimates was 300 pence to 510 pence as of Sept. 12, the audit office said.
While the government targeted long-term holders, 13 of the 20 largest institutional shareholders scaled back their holdings, including seven that sold out completely, the watchdog said.
A Department for Business representative is scheduled to appear on May 7 before the Public Accounts Committee.