October 11, 2013 / 9:11 AM / 6 years ago

Strong Royal Mail market debut fuels debate over price

LONDON (Reuters) - Shares in Britain’s Royal Mail (RMG.L) rocketed to a near 40 percent premium above their issue price in Friday’s stock market debut, fuelling a debate about whether they had been priced too low in order to guarantee a successful privatization.

An electronic information board is seen at the London Stock Exchange in the City of London October 11, 2013. REUTERS/Stefan Wermuth

The share price increase, which inflated the value of the near 500-year-old company to 4.5 billion pounds ($7.2 billion) in one of Britain’s biggest state sell-offs for decades, came after criticism from Labor the opposition Labour party that the government was short-changing taxpayers.

The stock hit an early high of 456 pence after the hugely oversubscribed sale of a majority stake had been priced at 330p per share, generating 1.7 billion pounds for the government before fees and a possible “overallotment” option of extra shares which can be sold depending on demand.

British Business Secretary Vince Cable again denied the government had undervalued Royal Mail, whose red mail boxes decorated with the Royal Crest are a feature of British landscapes from Land’s End in southwest England to John o’Groats in the far north of Scotland.

“You get an enormous amount of froth and speculation in the aftermath of a big initial public offering of this kind, it’s of absolutely no significance whatsoever,” he told the BBC.

“What matters is where the price eventually settles and if we look back on this in three months, six months time, or indeed years to come, that’s what we’re really interested in.”

After receiving around 27 billion pounds worth of orders for the 1.7 billion worth of shares on offer, the government allocated 33 percent of the offering to members of the public, with the rest going to institutional investors.

The appeal of the stock had been boosted by a lucrative dividend promise for shareholders. Royal Mail is to pay a final 2014 dividend totaling 133 million pounds, equating to a full-year payout of 200 million had it been listed for a full year and giving the shares a full-year implied yield of 6.1 percent - attractive at a time when a regular UK savings account is yielding less than 3 percent.


Cable said the bulk of shares had gone to long-term investors, mainly British pension funds and insurance companies.

Members of the Communication Workers Union (CWU), which represents postal workers and is holding a strike ballot over pay and job security, held a protest outside the London Stock Exchange (LSE.L) on Friday in opposition to the sale.

Around 30 gathered, some dressed as criminals, holding banners with slogans such as “The great Royal Mail robbery” and “Fat cats steal the profits”.

The government handed 10 percent of Royal Mail’s shares to staff in the largest share giveaway of any major British privatization, with just 368 of the 150,000 eligible UK-based workers declining to take up their free shares.

“Who wouldn’t take free money?,” CWU General Secretary Billy Hayes told Reuters. “But we’re confident next week we’ll have a big ‘yes’ vote for strike action.”

Hayes said Friday’s share price move showed the company had been undervalued by a billion pounds. “It’s outrageous what’s happening today,” he said.

Staff are required to hold the shares for three years.

Protestor Dominic Beck, a postal worker based in west London who has worked for Royal Mail for 20 years, said he was concerned about the future of his job.

“History shows us that when companies privatize, workforces deteriorate very rapidly,” he said.

A woman post a letter into a golden Royal Mail post box in central London, October 8, 2013. REUTERS/Andrew Winning

“In three or four years time they (the shares) might not be worth the money they are now. The people who are going to make the big money are the 70 percent (of institutional investors) ... They’re just going to cash in today.”

Royal Mail’s public offering leaves the government with a 38 percent stake, but this could fall to 30 percent should it choose to exercise the overallotment option.

The shares, which could be eligible to join the FTSE 100 index .FTSE of leading British shares at its next review in December, are trading conditionally until October 15, meaning in theory if the sale was cancelled the trades would be void. ($1 = 0.6268 British pounds)

Additional reporting by Sarah Young; Editing by David Cowell and David Holmes

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