Government is making plans to ensure 'smaller investors get their share', and do not lose out to banks and hedge funds
The government will bow to a mounting outcry and ensure the public do not lose out to banks, hedge funds and other financial speculators in the £3bn selloff of Royal Mail shares.
The Guardian understands that ministers are making plans to increase amount of Royal Mail shares available to the public at the expense of those set aside for banks, following overwhelming demand in the biggest privatisation since the sale of the railways in the 1990s.
Michael Fallon, the business minister in charge of the flotation, said he would do all he could to ensure "smaller investors get their fair share", ahead of Tuesday's midnight deadline to buy stock.
Fallon had promised that about 30% of the shares on offer would be reserved for the public but is now understood to be planning to increase this proportion available for small investors and cut back on the amount going to banks if public demand massively exceeds supply.
He said: "No decisions have been taken on allocation but I'm committed to making sure smaller investors get their fair share."
The government has been under pressure to ensure the public do not lose out to banks and hedge funds, which are hoping to make instant profits from the sale of the 500-year-old postal service.
Chuka Umunna, the shadow business secretary, said: "This is turning into a dream and a bonanza for City speculators and hedge funds, meanwhile the taxpayer … is getting massively shortchanged."
Financial institutions have ordered several times the number of shares available to them, amid reports that the government hugely undervalued the company, and the shares could soar by more than 30% on their first day's trading on Friday.
Stockbrokers have also reported unprecedented public demand for the shares, to be priced at between £3-3.30 each, with some staying open all weekend and until midnight Tuesday when applications close.
Alastair McCaig, market strategist at IG Index, said public demand for Royal Mail's shares has been "even stronger than we saw in Facebook".
IG said excitement over the flotation had sparked a frenzy in the pre-trading "grey market", with investors betting the shares will rise to £4 on Friday – 70p more than the maximum the government has allowed itself to sell them for.
If they do reach £4, the government will have lost out on an extra £400m it could have made if it priced the shares at £4, rather than £3.30.
Panmure Gordon analyst Gert Zonneveld – the only analyst to have published research on the shares – has said he is convinced the government undervalued Royal Mail by more than £1bn. Zonneveld said the shares should have been sold between £3.70 and £4.50, considerably higher than the government's initial range.
Vince Cable, the business secretary, on Monday hit back at Umunna for accusing the government of undervaluing the company and selling it on the cheap.
"It is irresponsible to imply that a share offering looks significantly undervalued," he wrote in a letter.. "I think you should consider the risk that you may be influencing the decisions of retail investors. Equity investment always involves risk, particularly when the company in question is new to the market. In the light of this it is dangerous to imply that there is an easy bargain to be made.
"Panmure Gordon is only one voice and their report notes both near term risks and opportunities. We are alert to value for money criticism and have learnt from the mistakes of previous governments' asset sales. QinetiQ is one key example under the last government."
In 2007, the National Audit Office criticised the float of defence company QinetiQ saying taxpayers lost out to the tune of tens of millions of pounds.
The government's valuation of Royal Mail is based on advice from investment banks Goldman Sachs and UBS after £21.7m in fees was paid to advisers. Applications for shares close at 11.59pm on Tuesday. The minimum public application is £750. If the public apply for more shares than those available they will "scaled back", meaning applicants will not be able to buy all the shares they have applied for. Big applications will be scaled back at a greater rate than small applications.
Up to 62% of the company will be listed on the stock market on Friday. A further 10% will be given to Royal Mail's 150,000 employees.
The final price the shares sell at will not be decided until the company floats on the stock market on Friday.
Trading places
One of the accusations levelled at the Thatcher and Major governments was that they sold off Britain's nationalised industries too cheaply. A look at how the shares fared on their first day of trading lends weight to this argument, although long-term returns give a clearer picture of a company's value.
British Telecom was the Thatcher government's first big privatisation. Its shares jumped 35% on the first day of trading in 1984, but when two later tranches were offered the price rose only 5% each time. British Gas followed in 1986, helped by its "Tell Sid" campaign. Its shares rose 10% on the first day. Powergen and National Power both soared by about 22% on their first trading days but when further batches of shares were sold later the price rose less than 5% in both cases.
In 1987, British Airways' shares leapt by two thirds on their first day of trading. But later that year BP's privatisation was launched at the time of Black Monday when shares plunged in New York and London on 19 October. Underwriters were left holding shares priced at 330p that were trading at 262p.
Article Source : http://www.guardian.co.uk
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