1st April 2014 by Tony Levene
An old City adages suggests “always leave something for the next man” – it was composed in an era when women were absent from the market – so give the buyer the expectation of a gain or they’ll shun a stock if they think it is fully or over-valued.
That’s the basis behind pricing an equity flotation. To get the shares away, you have to offer hope of a premium in secondary trading. Somewhere between 10 and 20 per cent extra post-IPO leaves both purchasers happy that they have a bargain and vendors satisfied.
But if that premium is huge, as with the Royal Mail IPO, then the balance disappears.
This IPO was hugely botched – and it hardly needs the skills of the National Audit Office to substantiate this. The NAO said the sale “could have achieved better value for the taxpayer” – a line that contains a tutorial in the art of understatement. Royal Mail was sold last October at 330p a share, closed 38 per cent up on its first day, has hit as high at 615p – up 86 per cent – and currently trades around 564p, giving a 71 per cent gain.
That’s not leaving something for the next man – that’s leaving a huge fortune to those who picked up IPO shares while depriving the sellers, the taxpayers, of around £750m.
There can only be one excuse for this drastic undervaluation – the need not to embarrass the Department for Business, Innovation and Skills with shares left on the shelf. Political expediency trumped over economic reality and the taxpayer interest.
IPO pricing is an art, for which investment banks are well rewarded. It can go wrong in the case of small narrowly traded stocks, especially if they are in fashion or fashionable sectors. Online frock retailer Boohoo is a good example of both “fashions”. It soared from 50p to 85p on its first day on the market in February. Now it is back to its launch price.
But Royal Mail is not a dotcom flash in the pan. It is a utility. It will not discover a miracle technology or find oil under its Mount Pleasant sorting office or suddenly drop off the public radar when the fashion worm turns. With some brokers suggesting 510p as good value, it should not have been difficult to squeeze at least another half a billion out of the sale. And the business department failed to understand – or worse, ignored its own intelligence – that big investors will talk up risks in the hope that the eventual price will be low. Who in the Government will resign over this?
Assuming politicians are ever capable of shame, one head that should roll in the Royal Mail fiasco is that of the hapless, hopeless and helpless business secretary Vince Cable.
He no longer claims that the big increase on the IPO price was “froth”. If it was froth, it was very solid. His line now is that “we have secured the future of Royal Mail through a successful sale”. Any sale can be successful if it is priced at give-away prices. No one ever expected him – as he puts it – “to achieve the highest possible price at any cost and whatever the risk.”
If he won’t resign, then he needs to apologise at least. While he’s at it, what about a big sorry for the way small investors were cut out of the deal in favour of institutions? Sixteen so-called priority investors ended up with half the shares on offer. Cable thought cutting down the private share buyer would ensure stability. He understands nothing. The NAO report reveals that six of the 16 sold all their shares within weeks, six sold significant amounts and only four increased their stakes.
Smaller shareholders, particularly those seeking income, may have proved to be more faithful investors.