Royal Mail Privatisation - Business, Innovation and Skills Committee Contents

Conclusions and recommendations

Objectives of the Sale

1.  It is clear that the Government met its objectives in terms of delivering a privatised Royal Mail with an employee share scheme. However, it is not clear whether value for money was achieved and whether Ministers obtained the appropriate return to the taxpayer. We agree with the National Audit Office that the Government met its primary objective. On the basis of the performance of the share price to date, it appears that the taxpayer has missed out on significant value. (Paragraph 14)

Offer Price

2.  Ministers placed great emphasis on the negative aspects of the industrial relations between Royal Mail and the Communications Workers Union, and in particular on the threat of strike action. While this was a significant factor for investors, we believe that the Government over-emphasised the risk. The share price before, during and after the Union's acceptance of a pay deal demonstrates that industrial relations were less of an issue for the market than they were for Government. (Paragraph 27)

Demand for Shares

3.  The level of the upper limit set for the potential price of shares gave investors a price above which they had no incentive to declare an interest. The Government's advisers must have been aware of this but failed to gauge demand at higher price levels. The fact that many long-term investors bought shares later at a far higher price is evidence to us that there was demand for Royal Mail shares at a higher price. We therefore do not accept the Ministers' assertion that the demand for shares would have disappeared at an offer price above 330p. The fact that both Ministers and officials have refused to acknowledge any level of demand for a higher price is, to say the least, disappointing. (Paragraph 35)


4.  The Secretary of State noted that the valuation of shares reflected the information that is available at the time. He also argued that "froth" had, in some way artificially inflated the share price. Unfortunately, he was unable to provide us with a meaningful explanation of its impact on the share price in terms of time and value. The Secretary of State's initial use of the term referred to the "immediate aftermath" of the flotation. This was subsequently extended to months and then possibly years. As a result we do not find the argument of "froth" as a credible response to the significant increase in the share price. (Paragraph 42)

Level of Discount

5.  It is accepted that all IPOs will be floated at a discount, with the share price expected to rise when shares are traded. This is important because a fall in the share price on flotation would inhibit the company from raising further investment. However, the rise in Royal Mail shares in the immediate aftermath was significantly higher than the normal percentage increases described by the banks. (Paragraph 50)

6.  We conclude that the Department underestimated the market value of Royal Mail and that the sustained increase in the performance of Royal Mail shares points to a pricing decision that was too influenced by perceived risks and fear of failure rather than maximising value for money for the taxpayer. (Paragraph 52)

Priority Investors

7.  We agree that it is sensible to identify, in advance, companies which are committed to investing in an IPO. However, we fail to see the benefit to the taxpayer of embarking on a policy of identifying long-term investors without either a criterion on which to judge them or any undertaking given by investors to support Royal Mail in the medium or long-term. The current ownership of Royal Mail by long-term investors has little to do with Secretary of State's actions. Unlike those preferred investors who bought cheaply and sold quickly at a profit, if the current investors are long-term, many of them may have bought at a price far higher than the one set by the Government. (Paragraph 63)

8.  We welcome publication of the list of priority investors. However, we are disappointed with the handling of this by the Secretary of State. Twenty-four hours before publication, the Secretary of State told us that such action would result in legal action against his department. We find the speed of this U-turn surprising. (Paragraph 64)

9.  The Government's publication of the names and allocations of the preferred investors only provides one part of the picture. We recommend that the Government update that list to include information on which investors sold their shareholding, when they sold and the share price of Royal Mail at that time. (Paragraph 65)

Royal Mail Assets

10.  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. (Paragraph 73)

Government Advisers

11.  It should be of concern to Ministers that the NAO concluded that they were too dependent on the professional judgement of its advisers, and that such a reliance on external advisers should be reduced. We do not believe that Ministers were well-served by their Departmental officials, the independent adviser or by the Shareholder Executive. Their blanket refusal to acknowledge a single mistake in spite of a critical auditor's report does little to inspire confidence in their organisations. (Paragraph 83)

12.  We recommend that the Shareholder Executive should be required to undertake a detailed valuation of any proposed sale so that the Shareholder Executive, Government and select Committees have a baseline against which to subsequently judge valuations made by independent advisers; (Paragraph 84)

Lazard and Value for Money

13.  The NAO is clear in its recommendation that "the taxpayer interest was not clearly prioritised within the structure of the independent adviser's role". We do not believe that this refers solely to an incentive payment structure. Prioritising value for money should not be motivated by financial incentives, it should be a central aim of all of those involved in the sale of public assets. That value for money was not a clear priority in Lazard's contract is unacceptable. (Paragraph 87)

Perceptions of Conflicts of Interest

14.  While we have no evidence of inappropriate behaviour by those companies employed by the Government, it is clear to us that any perception of financial advantage must be removed from the privatisation process. Therefore we recommend that the Department give serious consideration to excluding any company involved in the selection of preferred investors, as a preferred investor, even if the appropriate "Chinese walls" remain intact. (Paragraph 90)

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Prepared 11 July 2014