Royal Mail market debut fuels debate over price

Reuters/London

Shares in Royal Mail rocketed to a near 40% premium above their issue price in yesterday’s stock market debut, fuelling a debate about whether they had been priced too low in order to guarantee a successful privatisation.

The share price increase, which lifted the value of the near 500-year-old company to as much as £4.56bn 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 £1.7bn for the government before fees and a possible “overallotment” option of extra shares which can be sold depending on demand.

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 £27bn worth of orders for the 1.7bn worth of shares on offer, the government allocated 33% of the offering to members of the public, with the rest going to institutions such as pension funds.

Financial bookmaker IG said 102mn 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 totalling £133mn, equating to a full-year payout of £200mn or an implied yield of 6.1% - attractive at a time when a regular UK savings account is yielding less than 3%.

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% of Royal Mail’s shares to staff in the largest share giveaway of any major British privatisation, with just 368 of the 150,000 eligible UK-based workers declining to take up their free shares.