The Royal Mail Sale kafuffle.(2 Posts)
After today’s kafuffle, rightly saying that the Royal mail was sold off too cheaply, I don’t think the full facts are ‘out there’, but the coalition have to take responsibility of what is another financial cock up as politicians do not understand the financial markets.
Whether the Royal Mail should be sold off is a separate issue, for year’s globally physical mail volumes have suffered globally due to more private sector postal companies and the internet, so the Royal mail would need to cut costs/mechanise, more and more.
Next re the ‘recovery’ of the Royal Mail before sale, if memory serves, when Osbourne rescued their pension fund, it had a growing deficit for year after year that had reached £9 billion, so if like every other company it had to address that deficit, revenues would have been channelled to trustees to PAY DOWN that deficit for years to come, post prices would have gone up even more. IMO.
Re the pricing and conditions of the Royal Mail sale; at the time, the global equity markets were highly volatile mainly due to U.S. political impasses on passing an annual budget that if failed would see automatic spending cuts and debt ceiling issues. Next, when pricing a bond/equity issue, the investment bank managers in pricing a new issue for market launch usually look at domestic or international COMPARABLE companies, re the yield or P/E ratio, as a strong guide to investor appetite and pricing – and I’m not aware that there was a comparable company to the Royal Mail.
Re gauging institutional investor demand; so without the ability to present a sound valuation of the Royal Mail based on comparable companies with equity issues, the investment banks would be canvassing global institutional investors, in a highly volatile market, looking to get INDICATED (not yet firm) demand at ‘a rough price’ to then talk final price indications with the issuer, in this case the Royal Mail.
So in order to do this, for some time before launch an investment bank will indicate a price range, in which the investors can be assured of ‘roughly’ where the new Royal Mail issue would come, to galvanise the firm in-house demand e.g. pension funds, from these huge international investors.
An important fact here is that if finally priced on launch day OUTSIDE the range e.g. higher, any firm demand could evaporate as investors then have the right to cancel and the issue could bomb.
Re the governments priority; to get a successful launch, politically and market wise, especially if planning subsequent partial sell offs, as trying to squeeze the issue price too tightly now and causing a sell off of the first issue, sticks in investors minds and they then ‘pass’ next time.
So here we have the ‘perfect storm’ a Royal Mail issue difficult to price to the market accurately, a volatile stock market where institutional equity investors are cautious and could be buyers or sellers of equities on political ‘events’ elsewhere, the investment bank managers trying to build a firm investor demand book in these market conditions - and a government not willing to get political or market place egg on their faces by pricing it to tightly and seeing the issue bomb.
To my mind, the report that the government ensured 16 or so large fund managers were allowed to take down a huge amount of Royal Mail to ensure firm placement, this indicates that the government was trying to protect themselves of the price DOWNSIDE, as you don’t need to ensure firm placement when pricing an issue for launch too cheaply – as the rarity of the Royal Mail name, in a less volatile market, would have ensured that.
In my opinion due to market conditions that could turn either way on a sixpence, the timing of the issue was wrong, and therefore in the heat of the launch, the feedback and interaction between the investment banks (that price/launch bond and equity issues globally nearly every day) and the government’ fell down badly - mainly as government ministers are not like corporate treasurers who tap the markets fairly often and know what they are doing under market pressures.
It appears the main reason Labour did not sell off any of the Royal Mail, was they didn’t want to ensure the pension rights of the postal workers – via a funding deficit that was getting worse annually, and wasn’t going to go away..
"Peter Mandelson abandons plan for part-privatisation of Royal Mail"
• Business secretary blames poor market conditions
• Trouble looms over £10bn pension deficit
“As part of the deal, the government had been planning to take on the £10bn pension fund deficit, as well as to change regulation.”
“But now Mandelson has put himself on a collision course with Royal Mail, its pension trustees and unions by refusing to bail out the postal company's estimated pension deficit.”
“The trustees are expected to revise their estimate of the shortfall from the current figure of £3.3bn to at least £10bn in the next few weeks. This would require Royal Mail to more than double its annual payments to plug the deficit, which would bankrupt the company.”
I'd suggest that the only ones that have done well out of this, was the Royal mail workers themselves, given/owning shares and their pensions secured.
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