Royal Mail float: paying bankers' deferred fees would be 'mad', MP says

Select committee chairman says paying the extra fees would reward bankers who priced the float too low

The government would be "mad" to pay more than £4m in deferred fees to the banks that advised on Royal Mail's privatisation because they undervalued the company, the chairman of a parliamentary committee said after grilling the bankers on Wednesday.

Adrian Bailey, who chairs the Business, Innovation and Skills (Bis) select committee, said paying the fees, on top of more than £12m already handed over, would reward highly paid bankers who set the float price too low at the expense of the taxpayer.

Bailey gave his judgment after the committee questioned senior staff from Goldman Sachs and UBS, the banks that led the flotation. In more than two hours of questioning, they were accused of failing at their jobs and selling the taxpayer short.

The government sold 60% of Royal Mail at 330p a share last month, valuing the company at £3.3bn. But the shares leapt 38% on their first day of trading and closed on Wednesday at 550p, giving Royal Mail a market value of £5.5bn.

Goldman, UBS and five other banks that marketed the shares have so far been paid £12.7m between them but they could get a further £4.2m if Vince Cable, the secretary of state, thinks they warrant it.

Bailey said: "The government, in view of what has happened subsequently, would be mad to give them [the money].

"It would be seen as rewarding the private sector that lost the taxpayer potentially £1bn and, in these days of austerity, I think it would be a very politically dangerous thing to do. These are professional people, who got it wrong, and they would be rewarded despite the fact they got it wrong."

The banks in the syndicate that marketed Royal Mail to investors shared fees of 0.8% of the money raised, with Goldman and UBS splitting an extra 0.1% for leading the operation. The government's independent adviser, Lazard, has been paid £1.5m with no fees deferred.

Asked whether taxpayers would be willing to accept the banks getting the extra fees, UBS's James Robertson said: "I think that is for the secretary of state to decide. It is in his gift."

MPs questioned James Robertson and Richard Cormack of Goldman Sachs alongside bankers from Citi, JP Morgan and Deutsche Bank, which missed out on advising on the float. Gert Zonneveld of Panmure Gordon, who argued that Royal Mail was undervalued before the shares started trading, also appeared.

Goldman's initial pitch, made without inside information, valued Royal Mail at up to £3.75bn and UBS's top estimate was £4.6bn. The others were more than £1bn higher with JP Morgan's the highest at £8.5bn.

The banks' job was to sound out fund managers on how much they were prepared to pay for the shares and to generate demand in a so-called book-building process. As interest increased, they moved the price to the top of their initial 260p-330p range.

The UBS and Goldman bankers defended the sale price, saying a potential US debt default and the threat of a nationwide postal strike loomed over the flotation.

Robertson admitted the government could have got a further 20p per share if it had gone above the agreed range but he said the risks were too great because it would have caused a delay and pushed long-term investors to their limit. "Momentum can evaporate and go away very quickly … when we were looking at all the risks, on balance we chose to stick to 330p. We discussed it with the Shareholder Executive [which advises on privatisations] and Lazard and they discussed it with the secretary of state."

But committee members accused the banks of failing at their job and of being duped by potential investors, who always want to pay as little as possible.

Brian Binley, a Conservative member of the committee, told the bankers: "Somebody somewhere has failed the taxpayer and cost the taxpayer in this initial instance. I just wonder whether the taxpayer has the right to wonder whether for all the money you were paid you weren't very good at your job."

The committee's attention will now turn to Cable and his minister Michael Fallon, who will appear next Wednesday with representatives from Lazard and the Shareholder Executive. In his last appearance at the committee just before the flotation, Cable dismissed the prospect of a jump in Royal Mail's share price as "froth".

Bailey said the session with the bankers was preparation for asking Cable why he priced the privatisation so low.

"I think there was a recognition [by the committee that the price has been undervalued. Did they rate their political position as being more important than the interests of the taxpayer because if it was overpriced they would have had egg on their faces?"

Article Source : http://www.guardian.co.uk
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