Now that the deadline has passed to apply for Royal Mail shares, it seems appropriate to do a brief assessment of how the privatisation has gone so far.
A popular sale
Brokers and market watchers report that the shares have been in great demand, with orders vastly outstripping the supply which will be made available. This is undoubtedly good news – high demand allows the Government to sell at the top range of the price offer, and it is a reflection of market confidence that the company will prosper in the private sector. Enthusiasm was certainly stoked by Chuka Umunna doing the rounds of every broadcast studio to declare the stocks drastically underpriced (something which Vince Cable was right to warn him against, as it constitutes purchasing advice to the public), and Labour will no doubt allege that the fact the sale was oversubscribed proves their point. However, it is far better to have too much demand than end up struggling to sell an unattractive asset to too few purchasers – had that happened, Umunna would be calling the sale a flop.
The right price?
Setting the starting price range was always going to be a bit of a tightrope walk. The Government wanted to maximise the amount raised for the taxpayer, but they also wanted to ensure they attracted investors and got the newly privatised service off on a sustainable footing. The independent advice they commissioned recommended a price of between £2.60 and £3.30. High demand allows them to choose only to sell at the £3.30 level, though some City analysts are suggesting the price may immediately spike to £4 on the open market. Is that 70p per share of lost revenue for the Exchequer?
Perhaps, but most likely the reality is more subtle than that – market confidence is a tricky beast. Maybe the Government could have got a slightly better price, but the higher you crank the initial offering, the less buzz there is about the shares. The less buzz there is, the more investors start to wonder if they might find themselves buying into an undersubscribed stock. If the price had been to ambitious, Ministers could have ended up in trouble. In a balancing act, they have got a decent price for shares in a public service which five years ago Labour felt the market would not buy.
Who are the new shareholders?
As we noted back in July, Michael Fallon had several different markets in mind with the Royal Mail privatisation. 10 per cent of shares have been given to Royal Mail staff for free – of the 150,000 eligible for the £2,200 giveaway only 368 have refused to take part, which is an extraordinary success rate given the CWU’s rhetoric against the process. The wider IPO is open to individuals and institutional investors, and there has been strong interest from both groups. Fallon is reportedly keen to ensure the shares are held by a wide range of people, both aiding the stability of the company and giving the public an opportunity to take part. This is the right approach, and puts the lie to Labour’s claims that the privatisation will only benefit hedge funds. It’s important for the long term future of Royal Mail that some institutions are involved, just in case the company has to go to shareholders for more money at any point in the future, but it is also important that when a public asset is privatised then private citizens have the chance to become shareholders, too.
All in all, this stage appears to have gone well. After years of delays and uncertainty, including an abortive privatisation attempt by the Labour government, Michael Fallon has lived up to his reputation as a safe pair of hands. Long may it continue.