by Stephen Tall on April 1, 2014
The publication of a report today by the National Audit Office criticising the “deep caution” of Vince Cable’s department in setting the sale price of shares in Royal Mail has, inevitably, been leapt on by opponents of the policy. Critics who would, of course, have been equally happy crowing if the Department of Business, Innovation and Skills had set the price too high causing the flotation flop.
Vince Cable went to the despatch box of the Commons today to defend his department’s actions, making headlines for unambiguously stating, “The last thing I intend to do is apologise”. Here he is, in his own words, on the sale of the first batch of shares of Royal Mail:
The Secretary of State for Business, Innovation and Skills (Vince Cable):
The National Audit Office has today published its report on the Royal Mail sale of shares. The report confirms that we achieved our primary objective of securing a sale of shares, allowing Royal Mail to access the private capital it needs to invest and thrive. As a result the taxpayer now faces reduced risk of having to provide financial support to the universal postal service.
It was right that we took a cautious and measured approach to the sale. That approach was taken in the light of our primary objective, and reflects the considerable risks we faced due to industrial relations and challenging market conditions.
The price range for the shares was set following a comprehensive programme of engagement with over 500 potential investors and was benchmarked against valuations of comparable postal companies. I am clear that this was the correct approach to secure a successful transaction.
A more aggressive approach to pricing would have introduced significantly greater risk. The advice that we received in this respect was unambiguous. There was no confidence that a sufficient number of buyers would offer a significantly higher price. A failed transaction and the retention of Royal Mail in public ownership would have been a very poor outcome for the taxpayer, as the NAO report confirms.
Achieving taxpayer value is about securing both short-term and long-term benefits. In the short term, we have delivered a successful transaction, which raised £2 billion for the Exchequer, enabled over 690,000 members of the public to buy Royal Mail shares and put in place the largest employee share scheme of any privatisation in nearly 30 years. In the long term, we have reduced the ongoing risks to the taxpayer by putting Royal Mail in a position where it can operate commercially and finance its own funds if needed. In doing so, as the NAO confirms, we have achieved our key objectives.
The sale of shares in Royal Mail has delivered on our commitment to protect the universal postal service and safeguard vital services for the taxpayer.
Mr Chuka Umunna (Streatham) (Lab):
… The Secretary of State dismissed claims that a cherished national institution was being sold off on the cheap as “froth”. The truth is that this has been a first-class disaster for the taxpayer and those he once referred to as “spivs and gamblers” are laughing all the way to the bank. The very least he can do today is apologise.
The last thing I intend to do is apologise. What I do intend to do is refer to what the report actually said, as opposed to the spinning and froth that is being generated around it. Let me read again the report’s initial conclusion on value for money:
“By floating Royal Mail on the Stock Exchange the Department achieved its key objectives of introducing private capital and commercial disciplines. Given Royal Mail’s prospects and prudent initial capital structure it is now less likely that the taxpayer will have to provide public support for the universal postal service.”
That is what it actually said.
Let me address the criticisms, if that is what they were. The first was that the Department was cautious, but I would have thought that caution in this context had a lot to commend it. The reason the Department was cautious was the very real risk that the floatation could fail. The choice we faced was: had the floatation failed, it would have remained in public ownership and, despite the hon. Gentleman’s preference for keeping it in public ownership, the valuation placed on it continuing in public ownership was about £1 billion. That was not disputed by the National Audit Office. The alternative—the floatation which happened—resulted in a value for the taxpayer of £2 billion in cash and £1.5 billion in continued value of the retained sale. There was a choice between the £3.5 billion that resulted from the privatisation and the £1 billion had it failed, so it is absolutely right and sensible that we were cautious.
The hon. Gentleman made the point that there was a lack of flexibility in the initial public offering system. Indeed, the National Audit Office makes that point: there was a lack of flexibility. The question, therefore, is: were there any alternatives? Could this have been done in a different way? The Government could have eliminated the retail investors and had more flexibility over price at the time of sale, but as it happens one of the successes of the privatisation is the fact that 670,000 investors now have shares.
The other way of selling Royal Mail would have been through a trade sale, and of course we looked at that as an option. One of the reasons we did not pursue it was that we looked at the history of privatisation under the Labour Government. and there was one very good example of what happens when a trade sale is pursued: I refer the hon. Gentleman to the NAO report on the privatisation of QinetiQ. … What happened in that trade sale was that a company with an equity value at sale of £125 million was eventually valued at £1.3 billion—10 times what the Labour Government sold it for. That is the alternative model with which we were confronted.
Let me address specifically the issue of the long-term institutional investors. The hon. Gentleman is absolutely right to say that one of the key objectives, to which I attach particular importance, was ensuring that the long-term institutional investor base was strong, and indeed it is. When the hon. Gentleman looks at the breakdown of share ownership, he will see that between two thirds and 70% of the shares held as a result of the IPO are held by those long-term institutional investors. When we put that with the Government’s retained shares and those of the workers, we see a very large majority of investors who are committed to the long-term strength of the company. One does have to ask the question: why did some of the long-term institutional investors sell? Some bought, some sold. The reason they sold was that they considered the share price after sale was overvalued. It was an obvious market reaction, and that was the consequence. None the less, having a long-term investor base remains a basic objective, and we have achieved that fundamental objective.
Let me turn to the issue of the valuation, to which so much importance is attached. It should be blindingly obvious, although I do not think it is to the Opposition, that trying to sell 600 million shares at one go is a fundamentally different proposition from the 2 million to 3 million sold in daily trading, which explains why the price has varied since the flotation.
I have said and I continue to say that there is a great deal of froth in the valuation of this and other shares—that is how equity markets operate—and this particular share is surrounded by a great deal of volatility. There are two main reasons for that. The first is a great deal of uncertainty over industrial relations in a company that has had a very troubled industrial relations history. It is worth pointing out—I do not know whether the hon. Gentleman noticed—that the mere mention last week of a Unite strike took the stock price down by 20p. That was the context in which we had to make the sale. …
Looking at the volatility of shares, this company is exposed to a considerable level of competition, as a result of actions of regulators beyond the Government’s control. The estimate has been made—I think that I cited this to the Business, Innovation and Skills Committee—that a 1% fall in sales is the equivalent of a 17% fall in profits for this company. We hope, and we have every reason to be optimistic, that with the very good management of the company, the co-operation of the work force and the investment that privatisation now makes possible we shall have a positive outcome in terms of competitiveness, but there is a great deal of uncertainty, which lies behind the volatility of the shares.
We in the Government have been criticised, not least by the Select Committee, over the past few months because we failed to take account of the estimates made by the banks that were bidding for business. One section of the NAO report—the hon. Gentleman has clearly not read it—completely vindicates the Government’s decision to ignore those estimates as completely worthless. They were touting for business, the estimates had no value whatever and we were quite correct to ignore them. Much of the propaganda that he and his colleagues have developed over the past few years has proved to be completely beside the point.
Let me make a final point on valuation. The hon. Gentleman gave us a lecture on the dangers of undervaluing public assets, but let me just quote to him his Government’s experience of the difficult art of valuing assets. The former Prime Minister, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), sold large quantities of gold at between $250 and $300 an ounce, but the price subsequently increased to more than $1,500—five times the original value. That is the nature of the highly volatile markets in which we have to operate.
The NAO report reached the important conclusion that we had successfully achieved our objectives. Under this Government, we have taken a loss-making public enterprise and turned it into a highly successful, respected public company.
* Stephen Tall is Co-Editor of Liberal Democrat Voice, and editor of the 2013 publication, The Coalition and Beyond: Liberal Reforms for the Decade Ahead. He is also a Research Associate for the liberal think-tank CentreForum and writes at his own site, The Collected Stephen Tall.