John Hoffmire: What happened when the UK government sold part of its post office to the public?
Executives from Citigroup, Deutsche Bank, JP Morgan and Panmure Gordon (the four banks that did not participate in the IPO) placed valuations of Royal Mail pre IPO in a range of £3.7 billion to £8.5 billion, while UBS and Goldman informed the government that they believed they could ask an additional 20p to the 330p offer price. They decided against upping the offer due to the United States’ debt uncertainty and potential for labor action by Royal Mail employees.
The Communication Workers Union, which represents Royal Mail staff, said the government had given too much weight to the impact of the risk of a strike. On the same day as the hearing, UBS issued a note to investors advising them to sell Royal Mail shares and warning about too much optimism for future margin growth.
Royal Mail is expected to join the FTSE 100 at December’s index review, and by then the market will have settled the question of pricing fairness and hopefully the process for valuing such shares. The valuation process is at the core of the controversy, and with the government considering an offloading of shares of other firms, the process for pricing shares fairly becomes critical if the public is to receive adequate value.
If the purpose of the IPO was to raise funds to modernize the operation of Royal Mail, then it was a success; and since the government still has a considerable number of shares to sell, the price rise will carry over to the remaining government shares.
It is also important to note that a new contract has been signed by labor and the company since the IPO. This removes much of the threat of a large walkout by employee owners.
John Hoffmire teaches at SaÏd Business School at the University of Oxford.
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