Royal Mail Privatisation - Business, Innovation and Skills Committee Contents

5  Royal Mail Assets

66. The Royal Mail prospectus referred to a number of asset sales which would be included in the sale of the company. Three sites in London were highlighted as "surplus". They were:

—  a 14 acre site in Nine Elms, South London which was used formerly as the location of the Group's South London Mail Centre;

—  a site of over eight acres that forms part of land owned by the Group at Mount Pleasant in central London; and

—  a one acre site adjacent to Paddington main line railway station in central west London.[74]

The Department valued these sites together at around £200 million. When he spoke in the House on 1 April, the Secretary of State stood by that valuation:

    I made it clear that an independent valuation of those sites confirmed the authenticity of what was proposed. It was in the prospectus, and nobody has subsequently challenged that.[75]

67. In the run-up to the flotation a number of newspaper articles were published which questioned the government's valuation:

    The Guardian (12 September 2013): The Mount Pleasant depot, so big it takes a good 10 minutes to circumnavigate on foot, is itself a symbol of the assets potentially on offer to purchasers of the Royal Mail. It is located in an area that remained relatively down at heel for decades but now has home prices averaging £500,000. The Royal Mail last year announced a plan to sell off up to half the five-hectare complex, bringing in a potential £1bn. The company has already made £120m selling a smaller site in the West End of London, operations from which have been absorbed into a revamped Mount Pleasant.

    Telegraph (1 October 2013): The 13-acre site of the former Nine Elms mail centre is expected to be sold for redevelopment. The proceeds, which could reach £500m, according to one fund manager, compare with a £2.6bn valuation for the entire company if the shares are priced at the bottom end of the range announced last week.

    Telegraph (4 October 2013): Earlier this week The Telegraph disclosed that Royal Mail was likely to sell the 13-acre site of a former postal depot in Nine Elms in central London. Along with smaller sites in Paddington and Kings Cross, the proceeds could be as much as £500m, one fund manager said. This compares with a value for the entire company of between £2.6bn and £3.3bn, depending on the price at which its shares are sold in the flotation later this month.

68. In its Report, the NAO also pointed out that the surplus sites were part of analysts' Reports on the value of Royal Mail. The NAO highlighted the fact that equity research carried out by UBS argued that the surplus sites had a "hidden value" worth £330 million to £830 million. It concluded that: "the basis on which Royal Mail was sold did not fully recover the value of these sites".[76]

69. Mark Russell disputed the NAO's assertion that the value of the surplus assets were not fully reflected: "We would say we believe they were". However, he acknowledged that it was "difficult to prove it either way".[77] Despite that, he restated his belief that there was not any evidence for the view that it was undervalued.[78]

70. The accurate valuation of such property is complex. For that reason the NAO had previously recommended that surplus assets be removed from public companies prior to privatisation.[79] Where that was not possible, it recommended that:

    Arrangements to clawback a share of sale proceeds if assets cannot be satisfactorily removed; clawback can also be applied to operational sites which might become surplus in future.[80]

71. However, neither option was taken up by the Department. Mark Russell said that removing the surplus property from the sale was considered but rejected on the basis that it would have "almost certainly reopened the state aid settlement". [81] The State Aid agreement with the EU in 2012, covered the Government's restructuring of Royal Mail. According to the NAO, the proceeds from the sale of surplus property was "part of Royal Mail's own contribution to the cost of its restructuring (set out in its restructuring plan), and was an important element in the European Commission's decision to clear the State Aid".[82]

72. Mark Russell also said that claw-back provisions were not inserted because he believed that it:

    Confuses or can potentially depress the equity value of the business, because people will associate or try to attach values to that claw­back that might never actually materialise. They will deduct it straight away".[83]

This position was taken on the advice of "financial advisers and our lawyers".[84]

73. We note the conclusion of the NAO that the Government has not extracted the full value of the surplus assets owned by Royal Mail. What is more disturbing is that the Government ignored established NAO recommendations either to remove such assets from the privatisation process or to insert claw-back provisions on the future sale of the properties. The absence of claw-back provisions means that the taxpayer will not reap any benefit should the Department's valuation be proved to be wrong.

74   Royal Mail Prospectus, page 109. Back

75   HC Deb, 1 April 2014, col 733 Back

76   National Audit Office, The Privatisation of Royal Mail, HC (2013-14) 1182, page 17, para 2.4 Back

77   Q441 Back

78   Q456 Back

79   National Audit Office, The Privatisation of Royal Mail, HC (2013-14) 1182, page 17, para 2.4 Back

80   National Audit Office, The Privatisation of Royal Mail, HC (2013-14) 1182, page 17, para 2.4 Back

81   Q439 Back

82   National Audit Office, The Privatisation of Royal Mail, HC (2013-14) 1182, page 17, para 2.4 Back

83   Q450 Back

84   Q445 Back

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Prepared 11 July 2014