Royal Mail's Nightmare: A Booming IPO

For the U.K.'s Royal Mail, which is being sold by the government to the public in a share sale, the worst thing that could happen is a big rise in the stock price.

When Facebook Inc. first sold shares to the public last year, outrage and lawsuits followed after the stock quickly fell below the offering price, costing investors billions.

This week the deadline ended for investors to buy shares in the privatization of the U.K.'s Royal Mail, the 500-year-old postal service that even former Prime Minister Margaret Thatcher didn't dare sell. A public uproar might be in the cards as well -- only this time it will be triggered if the share price rises too much once trading begins.

The reason for the difference is simple: Facebook was an IPO and this is a government asset sale. Any large and sudden increase in Royal Mail's share price from the maximum 3.30 pounds ($5.26) the government has set would imply the asset was sold cheap. It would be seen as a windfall for rich City investors at the expense of taxpayers.

And given that opinion polls say most Britons don't want to see Royal Mail sold in the first place, that's political poison. Conditional trading among the big investors will start Oct. 11, with open trading on the London Stock Exchange on Oct. 15.

The U.K.'s Labour party opposes the sale on principle, just as it did Thatcher's many privatizations in the 1980s. It argues that Royal Mail is worth much more than the maximum 3.3 billion pounds at which it has been priced, because the government hasundervalued prime pieces of surplus property that go with the sale. Most of the company's 150,000 employees are against the privatization, too, even though they are receiving 10 percent of the stock for free. The company has said thatjob losses will follow.

A gray market in the stock run by the betting company IG Index has projected an initial bump in the share price of about 20 percent, with the offering heavily oversubscribed. The government's nightmare is that there is a big spike in early trading, followed by a tumble as speculators take a quick profit and sell.

The stock will have a dividend yield more than 6 percent, so there is some reason to hold on. As a long-term investment, though, Royal Mail looks like a bet for brave. The company's traditional letter delivery service is in decline. It is now dependent on delivering packages for mail-order companies, in particular Inc. What would happen if found another company to deliver its supersaver packages? Or if the Commercial Workers Union tells its members to stop work, when the results of a strike ballot are announced the day after the IPO?

(Marc Champion is a Bloomberg View editorial board member. Follow him on Twitter.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.