Royal Mail: Pricing of Shares

Lord Popat Excerpts

Tuesday 22nd October 2013 Lords Chamber

[Lord Donoughue]

To ask Her Majesty’s Government whether any shares in Royal Mail offered at 330p were issued to any of the banks involved in advising on the flotation price, or to any of their employees; and what are the total fees to be paid to those banks for advising on the offer pricing of the shares.

[Lord Popat (Con)]

My Lords, no individual employee working on the transaction or investment bank division was allocated shares. Other divisions of our banking advisers, separated from the investment banking divisions by the information barriers, were allocated 13 million shares. This is standard practice. The underwriting banks will share a maximum fee of 1.2% of the IPO proceeds, or £16.9 million. That maximum includes the potential discretionary fee of £4.2 million. The actual fee will be finalised shortly. Lazard will receive £1.5 million, as the Government’s independent adviser.

[Lord Donoughue (Lab)]

I thank the Minister for that reply. Is he aware that this morning the share price of the Royal Mail reached a peak of 507p, which is an advance of more than 50% on the offer price? In light of that, does he agree with the comment made in the Financial Times on Saturday? It said:

“The only loser is the taxpayer, whose furniture has been flogged—but at a fraction of its market price”.

Will the Government not try to recover something for the ripped-off taxpayer by at least insisting that they do not pay those exorbitant fees to these inadequate advisers?

[Lord Popat]

My Lords, we were given advice on the price for the shares by a large number of institutions. We took into account a recent flotation of a similar organisation in Belgium. We also took a view on the price determined for recently quoted companies in the UK. The price range was between £2.60 and £3.30. We pitched at the higher amount of £3.30. This flotation was very successful despite the difficulties happening in America and the impending strike by the union.

[Lord Forsyth of Drumlean (Con)]

My Lords, will my noble friend confirm whether any of the advisers on the share sale were the same advisers who advised the previous Government to sell our gold at the bottom of the market at a loss to the taxpayer of more than £10 billion?

[Lord Popat]

My Lords, I do not have that information. Our advisers were robustly looked into. Some 21 advisers made a pitch to us. Nine were selected and they advised us at a different stage of the flotation.

[Lord Sugar (Lab)]

My Lords, I assume that the hiring of Lazard, Goldman Sachs and UBS was for their so-called expertise in understanding the correct timing and pricing of the flotation of the Royal Mail. Will the Minister comment on why these so-called experts sold the stock at such a low level and got it totally wrong, to such an extent that the stock rose by 33% the day after and now sits at 54% higher than the issue price? Bearing in mind that other reputable banks had come on record giving a valuation of £5 billion, why were these banks ignored? What will the noble Lord do by way of an inquiry to find out who the lucky institutions were that underwrote this bargain basement sell-off?

[Lord Popat]

My Lords, our key objective has been to secure value for money for the taxpayer and to develop a strong business. The taxpayer still has more than 30% of the shares and the universal service will be secured for a long time. The proposal included an indicative valuation of the company based on many instances and solely on information already in the public domain. Banks made their own assumptions of the Royal Mail’s future performance. Hence we agreed a price of £3.30.

[Lord Elystan-Morgan (CB)]

Presumably those who were invited to advise on the flotation price were not required to pluck a figure out of the air but would have been instructed to arrive at their conclusion on the basis of certain criteria. Will the Minister confirm that that was the case and will he spell out those criteria to the House?

[Lord Popat]

My Lords, as I said, our key objective was to secure value for money and to make sure that this flotation was successful. The nine banks that we appointed set out the criteria and gave us advice as to the value of the shares that we should pitch at. One criterion was to make sure that the future of the Royal Mail continues to be strong. The most important criterion was that institutional investors were able to invest money for the future of the Royal Mail.

[Lord Razzall (LD)]

My Lords, perhaps I may follow the noble Lord, Lord Forsyth, in extending the Question. Does the Government have a view as to what steps the regulator should take regarding the irresponsible actions of the colleague of the noble Lord, Lord Donoughue, in another place in his public comments, which had the effect of encouraging small investors to buy shares without explaining the risks involved to them?

[Lord Popat]

My Lords, the prospectus was very clear about the risks involved in acquiring these shares. With regard to small investors, we allocated around 18% to retail investors. Ninety per cent of the retail investors who applied for shares up to £10,000 took up the shares knowing what the risks would be.

[Lord Young of Norwood Green (Lab)]

My Lords, can the Minister explain the contradiction between the Secretary of State’s claim that value for money was central to the Government’s strategy, given the current share price of over £5, and the view of many respected analysts that the offer price was seriously undervalued and 20% oversubscribed by banks? Can he give the House an assurance that the remaining 38% of shares will not be sold at another knockdown price?

--- Later in debate ---

[Lord Popat]

My Lords, the remaining 30% of shares is being held by the bank. We have an agreement with the Royal Mail that this will not be sold for a period of six months. The sale of shares thereafter will depend on the market circumstances and how the Royal Mail is performing in terms of its business profit and in terms of the cash that the business generates.

[Lord Dobbs (Con)]

My Lords, would my noble friend please spend a moment today celebrating the success of this exceptional privatisation, which has placed the Royal Mail on a footing for the future that was undreamed of four years ago? Would he further express and extend his best wishes not only to the management and employees of Royal Mail but also to their customers and of course their new shareholders, many of whom I suspect are sitting on the Benches opposite?

[Lord Popat]

I thank the noble Lord for those encouraging comments. This sale should be welcomed by all sides of the House. It guarantees that the universal service will remain and helps to provide the funding needed to modernise the Royal Mail. It provides a good solution for the taxpayer, for the Royal Mail employee and for customers. This is about ensuring the long-term success of the Royal Mail and securing the universal service. This privatisation is a positive step. The future of the company is now much brighter than it was. Had we pitched the price higher than £3.30 and it had failed, I am sure that the Benches opposite would have blamed us for the failure. I am glad that it was a great success and I agree with the noble Lord.