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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