Postal Services Bill

Lord Lea of Crondall Excerpts

Wednesday 4th May 2011 Lords Chamber

Moved by

[Lord Lea of Crondall]

1: Before Clause 2, insert the following new Clause—
“Restriction on disposal of shares in a Royal Mail company by Initial Public Offering
A relevant disposal by an Initial Public Offering may only issue or transfer shares representing no more than 30% of the value of a Royal Mail company within the period of one year after this section comes into force.”

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[Lord Lea of Crondall]

My Lords, if the Bill reaches the statute book in its present form, in a year or so we will almost certainly have a repeat of the public interest being prejudiced by the modalities of the sale by merchant banks, as has happened some times before. However, as all noble Lords are surely aware, Conservative Governments have form on the modalities of sales of public assets—in effect, selling the family silver on the cheap. As Harold Macmillan remarked, you can only do that once. How do we then protect the public interest?

During the debate in Committee on the sale of Royal Mail, whenever noble Lords sought to ensure that value for money for the taxpayer would be achieved if Royal Mail is sold, the response came that it would be foolhardy to reveal a valuation, because once the bidders got to hear of it they would never exceed it. One could of course imagine arrangements whereby an independent valuation was obtained and not published for the world to see. It could even be shared on a strictly confidential basis with, for example, members of the Public Accounts Committee. However, that is not the main point. As these arguments flew back and forth, I realised that in some noble Lords’ minds was a fixed picture of a set of competing companies bidding to buy Royal Mail as though it were a valuable silver cream jug at Christie’s—in other words, what is known as a trade sale.

However, I ask noble Lords to consider the scenario that the company will be put up for sale in an IPO—an initial public offering or a sale of shares to the public. From Richard Hooper’s 2010 report, this certainly seems to be a possibility that he has in mind. However, after that report and in our previous debate on 14 March, the noble Lord, Lord Razzall, who I am glad to see in his place, declared that,

“anybody who thinks, in the Royal Mail's current circumstances, that there can be an IPO, is living in a total fantasy world”.—[Official Report, 14/3/11; col. 102.]

Richard Hooper and Ministers, however, have repeatedly included that option. In his most recent report Richard Hooper stated that,

“there are now greater options for introducing private sector capital and disciplines. It does not have to be a sale to a partner. The much needed equity capital could, for example, be raised by means of an IPO (Initial Public Offering), turning Royal Mail into a publicly listed company. The company’s need for cash, and the timing of that need, will influence the choice of preferred option”.

More recently, in oral evidence to the Public Bill Committee in another place, he said:

“There are various ways of getting private sector capital. One is a trade buyer and another is a private equity player”.

He went on:

“There could, of course, be an initial public offering”.—[Official Report, Commons, Postal Services Bill Committee, 11/11/10; col. 109.]

Coalition colleagues are also open to an IPO. At Second Reading the Conservative noble Baroness, Lady Wheatcroft, in a well-considered contribution, stated:

“I hope that as the sale of Royal Mail approaches the possibility of an IPO will be top of the list of favoured options. I know that the Government's position is that the sale is open to all comers, but an IPO would get my vote”.—[Official Report, 16/2/11; col. 743.]

In the BIS document, Delivering for the Future: A Universal Mail Service and Community Post Offices in the Digital Age, published in October 2010, paragraph 2.6 states:

“We will retain flexibility so that we can negotiate the best possible outcome, including keeping options open as to whether a trade sale or initial public offering is more appropriate”.

Let us consider the possibility of an initial public offering. There is a very strong case that shows that in the heyday of privatisations in the 1980s and 1990s, privatised companies were consistently sold at too low a price. For British Airways, British Gas and British Telecom alone, the undervaluation on the first day of trading amounted to more than £2 billion. Indeed, it has been estimated that for 1986 alone the average share issue premium on major share issues was 7 per cent, but on privatisation issues the average premium on the first day of trading was 77 per cent.

One case illustrates the point very well. British Telecom shares were sold in three tranches. It was difficult to establish a correct sale price. There had not been a market by which to establish a clear and correct opening share price, as there will be for Royal Mail if its sale comes about. After the first tranche of shares was sold, the share price rose. Over the course of a year, the BT shares increased in value by 84 per cent. Several factors could conceivably have caused that increase, very sharp though it was. All share prices could have been rising, or there could have been an improvement in the company’s prospects, but what if I tell noble Lords that on the day after the original flotation anyone who had bought the shares at the offer price saw the value of those shares increase by some 90 per cent in 24 hours? The obvious conclusion is that a higher price could have been achieved for the taxpayer—in other words, the shares were underpriced and the taxpayer was short-changed. Fortunately, not all the shares had been put on the market on that fateful day.

Having regard to that experience, with the second tranche there was still an increase the next day but it was 5 per cent, rising to 22 per cent a year later. In the third and final tranche, the shares rose by just 5 per cent the next day and were still just 5 per cent higher a year later, so the pricing was much closer to the right level and the taxpayer was saved a very large sum. That is not surprising as the offer price in the new tranches could be judged against an existing traded price of shares from the original tranche. Therefore, this amendment proposes that in the event of the sale of Royal Mail by means of an IPO or general sale of shares, the sale should be phased in tranches, with no more than 30 per cent being sold before 31 July 2012 and no other shares being disposed of before 31 July 2013.

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[Lord Lea of Crondall]

I thank the noble Baroness for her courteous reply. I am obviously very pleased to have heard the three contributions from these Benches but I want to pick up on the point made by the noble Lord, Lord Razzall.

Of course, nothing is exactly the same as it was 20 or 30 years ago but it remains the case that the only way that the Government can get a very high price is to say that there will be no universal service obligation. I do not know whether the noble Lord, Lord Razzall, and others would generally agree with that, but clearly the less you guarantee a universal service obligation, the more you can get, whether through an initial public offering, Deutsche Post or anything else. Furthermore, we are still waiting to see the guarantees on the inter-business agreement.

The public interest—that is, the public in cities, towns and villages—is at risk, as is, by the way, the workers, and if I say “by the way, the workers”, noble Lords will know where I am coming from. Later in our debates on the Bill we may hear something more specific and concrete from the noble Baroness in terms of commitments on the universal service obligation or the inter-business agreement. That is the context in which we are talking. As regards arbitrary deadlines, I am not the first person to mention dates with regard to the Bill. Indeed, it is self-evident that you have to mesh what we are talking about today with all the other dates that are flying around.

I do not think that noble Lords should be denied the opportunity to express their opinion on this question and I therefore wish to test the feeling of the House.