Royal Mail major shareholders to be asked if shares were too cheap

Commons business committee plans to write to large investors as part of bid to find out if state-owned postal service was undervalued

Royal Mail investors who bought large stakes in the postal service following its £3.3bn privatisation last month are to be asked by MPs why they have staked hundreds of millions of pounds on the view that the government sold the firm on the cheap.

The news emerged after the Commons business committee investigating the Royal Mail flotation questioned the business secretary, Vince Cable, and his ministerial colleague Michael Fallon how the offer was valued, prompting an assertion from Cable that there was no need for an independent inquiry into the process.

Committee chairman Adrian Bailey said he will be writing to the The Children's Investment Fund (TCI) and GIC, Singapore's sovereign wealth fund, which have built up their Royal Mail stakes since its listing to more than 6% and 4%, respectively – having decided the shares would rise far above their 330p flotation price.

He said: "Yes, we might well want to [write to major new shareholders to ask why they value Royal Mail so highly]. We are reviewing the transcript [of evidence] to identify areas to follow up."

The committee has been investigating whether the taxpayer has been shortchanged by the Royal Mail flotation, in which 60% of the shares were sold to outside investors last month. The share price has since soared by about 70%, prompting criticisms that the government could have demanded a higher price. The Bow Group, a thinktank led by former prime minister Sir John Major, has called for an independent inquiry into the privatisation.

When asked if he thought an inquiry was required, Cable replied: "Absolutely not. We think this is a good process for the taxpayer."

He added that the valuation was only one criteria in deciding whether or not the taxpayer had received value for money, as the company could have withered – and its services put at risk – without access to private capital to invest in its future.

"Bearing in mind the set of objectives which we set at the very beginning ... the value for money is partly dependent on the offer price, it's partly dependent on the continuing value of the state's [30%] share, and it's partly dependent on what happens to the company. If the company isn't able to invest successfully [in its business], you could be left with a serious casualty. When we take all those things together, I think the conclusion will be, when people have settled down, that this has been a very professional well-managed and successful operation."

Royal Mail floated at 330p a share when the government sold 600m shares last month. Once the shares began trading on the stock exchange, they quickly soared. The shares were up 5% on Wednesday afternoon following the group's first results statement as a public company, changing hands at around 563p.

Also being questioned alongside Cable and Fallon were Mark Russell, the chief executive of Shareholder Executive which holds state stakes in businesses, and William Rucker, the chief executive of the government's main financial adviser, Lazard.

Russell said the government had been taken by surprise by the surge in the share price, telling the committee: "We did not anticipate the share price to move to the extent that it did."

He added, however, it had been anticipated that the shares would rise following privatisation, which was part of the reason why the government had retained a 30% Royal Mail stake. Typically, the City hopes the shares rise by around 10% on the first few days of trading following a flotation.

Bailey also asked the witnesses if it was predictable that Royal Mail shares would surge so strongly, with the offer was 20 times oversubscribed by investors.

Lazard's Rucker claimed not: "A lot of the orders [for shares] that go into the books ... there is a heavy element of gaming. The three biggest orders were $1bn each. That would have represented 20% of the company. Those institutions had no expectations of ever receiving anything like that quantity of the stock."

Article Source : http://www.guardian.co.uk
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Royal Mail shares: hedge fund takes biggest private stake

TCI's 5.8% slice of Royal Mail shares fuels criticism of Vince Cable over 'fire sale' as Labour says small investors let down

A hedge fund known for its aggressive investment strategy has become the largest private shareholder in Royal Mail, re-igniting anger overVince Cable's controversial privatisation of the postal service.

The Children's Investment Fund owns a 5.8% stake in the 500-year-old postal service, making it the largest shareholder behind the government, which has a 38% stake. TCI is controlled by publicity-shy Chris Hohn, who pressed for the sale of ABN Amro, which ended in the Dutch bank's disastrous takeover by the Royal Bank of Scotland, and has been dubbed a "locust" in Germany for its investment style.

TCI's stake in Royal Mail came to light under stock market rules obliging investors to report holdings greater than 5%, and was seized on by government critics who argue that the business secretary failed small investors by selling the shares off to "big money" in the City and failing to live up to his promise to sell them to long-term investors.

TCI revealed that it owns 58.1m shares, on a day when the shares rose to 499p, slightly down on last week but still 50% higher than the 330p the shares were sold at.

Hohn, the Surrey-born chief executive of TCI, is also among the UK's most generous philanthropists and first came to prominence in 2005 after he ousted the chief executive of Deutsche Börse, Werner Seifert, ending his bid to take over the London Stock Exchange. Seifert retaliated by branding TCI partners and its US equivalents "locusts".

The bulk of the controversial hedge fund's stake in Royal Mail is likely to have been bought on the stock market rather than directly from the government, but it may still raise hackles among trade unionists who recently voted for a nationwide 24-hour strike next month. It has also reignited criticism from Labour that Royal Mail was sold on the cheap.

Ian Murray, the shadow minister for trade and investment, argued that small investors had been failed by the government's "fire sale".

"We have seen small investors losing out while the vast majority of shares sold have gone to big-money investors in the City," he said. "Vince Cable claimed that the sale would prioritise long-term investors but serious questions will be asked on whether this is the case, not least given the huge volume of trades in Royal Mail shares which we have seen in the first days of trading, running into hundreds of millions."

He added: "This is on top of real concerns that taxpayers have been left short-changed to the tune of hundreds of millions of pounds at a time when families across Britain are facing a cost of living crisis."

Cable told a committee of MPs earlier this month the government was in "a position to ensure that we do get the right kind of investor community". He said: "We are talking about pension funds and insurance companies that hold the savings of millions of people, and we have been very clear that that is the kind of relationship we want to have, that is long-termism."

A spokesman at the business department referred to these comments and said the government was not disappointed with a hedge fund owner, adding: "It is not a matter for us, it is a matter for the company."

TCI and Royal Mail declined to comment.

Hedge funds have been among the city institutions and retail investors scrambling for a slice of Royal Mail, in part because they believe modernisation of the postal service could happen faster than planned.

David Buik, a market commentator at Panmure Gordon, described Hohn as an extremely shrewd businessman. "My guess is that he thinks it is a probably a very good company. I suspect he thinks it is undervalued – I suspect he has bought his stake in it for that reason." Neither will it have escaped his attention that Royal Mail is a plum takeover target, Buik added.

"If things don't work out on an independent basis, it would look very cosy in the portfolio of UPS or Deutsche Post."

TCI has grown into one of the world's largest hedge funds since its creation in 2003, and currently has $11bn in assets under management.

In recent months it has been buying into companies with corporate governance concerns, such as Japan Tobacco and Rupert Murdoch's News Corp in the wake of the phone hacking scandal. Since News Corp was split, TCI now owns a stake in Twentieth Century Fox.

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

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Royal Mail's first-class returns fail to silence critics

On Friday many people could see the value of their stake instantly rocket. While 96% of postal workers are against it, for the government – and City investors – it offers a huge windfall

A half millennium of history will end on Friday when the government goes where even Margaret Thatcher dared not tread and privatises Royal Mail.

In between divorcing and beheading wives, Henry VIII appointed Brian Tuke to the newly created role of "Master of the Posts" in 1516. The job was a forerunner to Postmaster General and the service – which for its first 119 years was reserved for royals to send letters between palaces – became Royal Mail.

The postal service, the world's oldest, has remained in public ownership ever since, despite attempts by both the Tories' Lord Heseltine and Labour's Lord Mandelson to flog it and swell the nation's coffers.

Thatcher, who sold off British Gas, British Airways, British Telecom and dozens of other state-owned institutions in the 1980s, drew the line at Royal Mail, saying famously that she was "not prepared to have the Queen's head privatised".

But on 7am on Friday up to 70% of Royal Mail will be sold to investors and listed on the London Stock Exchange – swelling Treasury coffers by about £2bn, though that will no more than dent the £115.7bn deficit the government ran up on the public finances last year.

The government is pressing ahead with the sale despite fierce opposition from the public, politicians of all hues and Royal Mail's 150,000 postmen and women, who are planning days of debilitating strike action in protest.

Vince Cable and Michael Fallon, the business secretary and business minister in charge of the sale, say that in these straitened economic times Royal Mail can no longer be owned by the state as it has to compete with schools and hospitals for much-need investment. Royal Mail needs to borrow hundreds of millions of pounds to prepare for a future delivering parcels ordered online from the likes of Amazon and Asos, rather than cards and letters that are dying out in favour of emails and messages on Facebook or Twitter. Letter traffic has dropped by a quarter over the past five years to just 58m items a day.

"It cannot be right for Royal Mail to come cap-in-hand to ministers each time it wants to invest and innovate," Cable said. "The public will always want government to invest in schools and hospitals ahead of Royal Mail."

Fallon has said that if Royal Mail were to remain in state hands "every £1 it borrows is another £1 on the national debt. That means growing the national debt. No responsible party could propose that in the current environment, or for that matter in any environment, when Royal Mail – run on a fully commercial basis – has the capacity to be cash-generative, profitable and perfectly able to raise the capital it needs from the private sector."

After years of heavy losses – £320m in 2010 and £258m in 2011 – Royal Mail is now steadily increasing its profits. In the latest accounts available, for the six months to September 2012, it made operating profits of £144m compared with £12m a year earlier, while sales remained roughly flat at £4.4bn.

Royal Mail has also been given greater freedom to increase the price of stamps – over the past five years the price of a first-class stamp has risen from 41p to 60p – and is allowed to make a "reasonable commercial return" (a margin of 5-10%) on its universal service obligation to deliver to every address in the country six days a week, which the government promises will be maintained for the foreseeable future, no matter who owns the company.

Royal Mail has also been freed of its £12bn pension fund deficit by transferring the scheme from the company to the state, at a cost of £1.3bn in the first year alone.

City experts reckon these changes outweigh the threat of strike action and any political and public backlash and will make Royal Mail very attractive both to big banks and investment firms as well as the public, who are able to buy its shares as long as they can stump up a minimum of £750.

Gert Zonneveld, managing director of stockbroker Panmure Gordon, said he expects the flotation to be a "raging success", with investors trying to buy up to 10 times as many shares as are available, But most of the demand, he said, is down to the "exceptionally attractive" value the government has placed on the shares. It has said they will be priced between 260p and 330p, giving the company a maximum market value of £3.3bn.

Zonneveld reckons the government's range represents an "exceptionally good entry level for investors", and said the shares should have been priced at up to 450p.

"I'm so convinced they [the government] got it wrong," Zonneveld said. "I think they're more than £1bn too low [in their valuation of the company]."

By comparing Royal Mail's profits and revenues to that of other listed postal services in other countries, Zonneveld thinks the company should be valued between £3.7bn and £4.5bn.

Under his valuation, Royal Mail would join the FTSE 100 list of Britain's biggest companies, which means tracker funds would be forced to buy the stock, sending demand – and the price – even higher. "I think this is going to be massively oversubscribed," he said. "Institutional investors who want £10m will increase their order to £50m because they know their orders will be scaled back."

He predicts that the share price could rise by 30% on the first day of trading on Friday. It means the government could lose out on about an extra £500m if it had priced the shares at 450p. The government has said it will not increase the price range above 330p no matter how high the demand for the shares.

The expected jump in the share price could go some way to placating Royal Mail's 150,000 employees, who are in the midst of voting for nationwide strike action, the first since 2009, which cannot take place until 23 October.

The government is giving employees 10% of the shares for free. If the shares at the top end of the government's 330p estimate,each employee will own shares worth £2,200 on Friday morning. If they perform as Zonneveld predicts they could be worth £2,860 by Friday afternoon.

But even the prospect of nearly £3,000 is not enough to win over most postmen and women. The Communication Workers Union, which represents 115,000 Royal Mail staff, says that 96% of employees are adamant in their opposition to the sell-off.

"I don't want the money," Theodore Mbungu, 56, said as he trudged about his north London round last week. "I want my job to stay the same. When it's private we will be paid less and have to work harder. What other job is there where you talk to people every day and they are happy and smiling and excited to see you?

"In what other job can you do your work and then go straight home, even though you're still being paid? I love being a postman. It's the best job in this country, but I know once the men in the City get their hands on it, it will never be the same again."

Article Source : http://www.guardian.co.uk
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Royal Mail profits surge ahead of planned sell-off

Annual profits rise to £324m as the government prepares to sell the 497-year-old postal service

Royal Mail has reported a 60% increase in pre-tax annual profits to £324m, as the government prepares to sell off the 497-year-old postal service in the most ambitious privatisation since British Gas in 1986.

The company, which ministers hope to float on the London Stock Exchange within a year, said its pre-tax profits in the year to the end of March increased to £324m from £201m a year earlier. Sales, which were boosted by a 30% rise in the price of first class stamps to 60p, increased by more than £500m to £9.3bn.

Moya Greene, the chief executive, said: "Our strategy is delivering. The transformation of Royal Mail is well under way."

Speaking publicly about the privatisation plans for the first time, she said a sale of part of the business would allow Royal Mail to "combine the best of the public and private sectors".

She promised that the sale would not affect Royal Mail's universal service obligation to deliver to every address in the UK six days a week for the same price. "We are honoured to provide the universal service to more than 29m addresses across the UK," she said. "[It] can only be changed by a vote in both houses of parliament."

Greene pleaded with her staff, who have rebelled against the sell-off plans, to "continue to drive our business forward as we seek to realise our collective objectives".

"These are times of significant change and we are asking a lot of our people," she acknowledged.

The Communication Workers Union (CWU), which represents postal workers, has vowed to fight the sale, which it says will lead to a "worse deal for customers, staff and thousands of small businesses dependent on the Royal Mail". Dave Ward, CWU deputy general secretary, said the positive results were "more compelling evidence of why Royal Mail should be kept in the public sector".

Royal Mail privatisation is pushing ahead as profits are up.

 "Privatisation isn't necessary and it would destabilise the workforce and the good progress being made. The support of the workforce is crucial to the success of the company."

Michael Fallon, the business minister, has warned the union that the world's oldest postal service could be sold to sovereign wealth funds or other foreign buyers if the CWU continues to fight its flotation. He said the government was "committed" to the sale and Tuesday's results were "another encouraging step" towards it.

The business secretary, Vince Cable, said there was "no alternative" to privatisation, and Royal Mail still faces a "fundamental threat" from email, texts and social media.

Greene, a Canadian who joined Royal Mail three years ago from Canada Post, said she has held discussions with a number of "high quality investors" in Canada and the US and said it would be "foolhardy" not consider the sale of the company to foreign buyers. "The IPO [initial public offering] market in the past few years has been quite unpredictable," she said. "It would be foolhardy not to consider other options."

She said she was disappointed with the union's "philosophical" stance against privatisation. "They believe government ownership should continue even though it fell into a very deep hole," she said.

Greene said that before Royal Mail embarked on its transformation plan, the company was "20 years behind" postal services in other countries.

She indicated that Royal Mail workers will face further rounds of redundancies as the company "has to be sized appropriately for the [declining] traffic we have to process". She declined to state how many more jobs are likely to be lost, but said more than 50,000 have been cut over the past decade.

Staff are due to collect 10% of the shares in the company, which could be worth £1,500 for each employee, when it is privatised.

However, the union said the government could not "buy off" postal workers with the vague offer of shares in the privatised company. "That's not going to cut the mustard," said Billy Hayes, general secretary of the CWU. "Our members don't want £1,500 if it is going to result in depressed terms and conditions and another five streets on a delivery."

Greene said profits would have been as high as £440m accounting for "transformation costs" of redundancy payments and other costs in reshaping the business, which is switching its focus from letters to parcels.

"Just over three years ago, our core UK business had significant cash outflows [ie was making losses]," she said. "Now, despite the challenging UK economic conditions, UKPIL [UK Parcels, International and Letters] contributes the majority of group operating profits."

She said the boom in online shopping had boosted the company's parcel business, to account for almost half of revenues. The number of parcels delivered last year increased by 70m to 1.4bn.

However, she said the letters business was suffering a "structural decline". On average 58m letters are sent every day, compared with 63m in 2011-12.

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