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Strong Royal Mail market debut fuels debate over price

An electronic information board is seen at the London Stock Exchange in the City of London October 11, 2013. REUTERS/Stefan Wermuth
An electronic information board is seen at the London Stock Exchange in the City of London October 11, 2013. REUTERS/Stefan Wermuth

By Kylie MacLellan and William James

LONDON (Reuters) - Shares in Britain's Royal Mail rocketed to a near 40 percent premium above their issue price in Friday's stock market debut, fuelling a debate about whether they had been priced too low in order to guarantee a successful privatization.

The share price increase, which lifted the value of the near 500-year-old company to as much as 4.56 billion pounds ($7.3 billion) in one of Britain's biggest state sell-offs for decades, came after criticism from the opposition Labour party that the government was short-changing taxpayers.

The stock hit an early high of 456 pence after the hugely oversubscribed sale of a majority stake, priced at 330p and generating 1.7 billion pounds for the government before fees and a possible "overallotment" option of extra shares which can be sold depending on demand.

By 1253 GMT the shares were trading at 440p.

Business Secretary Vince Cable denied the government had undervalued Royal Mail, whose red post boxes decorated with the Royal Crest are a feature of landscapes from Land's End in southwest England to John o'Groats in the far north of Scotland.

"You get an enormous amount of froth and speculation in the aftermath of a big initial public offering (IPO) of this kind," Cable told the BBC. "What matters is where the price eventually settles and ... that's what we're really interested in."

After receiving around 27 billion pounds worth of orders for the 1.7 billion worth of shares on offer, the government allocated 33 percent of the offering to members of the public, with the rest going to institutions such as pension funds.

Financial bookmaker IG said 102 million shares had changed hands in the first hour, almost a fifth of the total on offer. "Clearly there has been an awful lot of euphoria and maybe an element of hype ... so maybe people have got a bit carried away," said David Jones, IG's chief market strategist.

Brokerages including Hargreaves Lansdown reported the surge in demand meant some customers had problems accessing their accounts. A spokesman said Hargreaves had put six times the normal number of people on the dealing lines taking calls.

The appeal of the stock was boosted by a lucrative dividend promise, consisting of a final 2014 dividend totaling 133 million pounds, equating to a full-year payout of 200 million or an implied yield of 6.1 percent - attractive at a time when a regular UK savings account is yielding less than 3 percent.

LONG TERM

Members of the Communication Workers Union (CWU), which is holding a strike ballot over pay and job security, protested against the sale outside the London Stock Exchange . Around 30 gathered holding banners with slogans such as "The great Royal Mail robbery".

The government handed 10 percent of Royal Mail's shares to staff in the largest share giveaway of any major British privatization, with just 368 of the 150,000 eligible UK-based workers declining to take up their free shares.

CWU General Secretary Billy Hayes said Friday's share price move showed the firm had been undervalued by a billion pounds. "It's outrageous what's happening today," he told Reuters.

Dominic Beck, a west-London based Royal Mail worker of 20 years, said he was concerned about the future of his job. "History shows us that when companies privatize, workforces deteriorate very rapidly," said Beck, who like other staff is required to hold his free shares for three years.

Simon Maughan, analyst at Olivetree Financial Group, estimated that on a forward EV/EBITDA (enterprise value to core earnings) basis, Royal Mail would be valued in line with the EU parcel and postal sector average of around 6.8 times, including peers such as Austrian Post , at about 460p per share.

Businesses are typically sold at a discount of 10 to 15 percent in IPOs to compensate investors for risking their money.

A person familiar with the matter said there were factors to consider in Royal Mail's valuation, including challenges such as the risk of strike action and its declining letters business, as well as the unusually large stake being sold in one go.

"When you look at the price at which you can sell 60 percent of a company that has never been listed before on one day, compared to the price you can trade a small parcel of shares in the market, clearly there is a massive discount," he said.

Royal Mail's public offering leaves the government with a 38 percent stake, but this could fall to 30 percent should it choose to exercise the overallotment option.

The shares, which could be eligible to join the FTSE 100 index <.FTSE> of leading companies at its next review in December, are trading conditionally until October 15, meaning in theory if the sale was cancelled the trades would be void.

Only institutions - and those who ordered stock through a broker offering conditional trade - can so far sell, not those who bought through the official website or by post. It was not clear what proportion of private investors are excluded from selling until unconditional trade starts next week.

Goldman Sachs and UBS ran the sale, and were also joint bookrunners along with Barclays and Bank of America Merrill Lynch . Lazard was financial advisor to the government.

(Additional reporting by Sarah Young; Editing by David Cowell and David Holmes)

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