Royal Mail Shares Soar

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Paul Hannon and Alex Macdonald, Wall Street Journal, October 11, 2013


Shares of U.K. postal service  Royal Mail PLC  RMG.LN -2.20%     soared on their first day of trading, rising 38% above the government’s original offer price and leading to criticism that taxpayers have been deprived of needed revenue.

Royal Mail shares reached an intraday high of 460 pence a share, from an original offer price of 330 pence a share, which was already at the top end of the government’s price range. The shares ended Friday at 455 pence.

The initial public offering of a 52% stake in the postal-services group is part of the U.K. coalition government’s plan to sell off state assets to help cut the country’s budget deficit. It represents one of the biggest and most controversial privatizations the country has seen for decades.

The Communications Workers Union, many of whose members work for Royal Mail, criticized the government’s handling of the sale. “The massive jump in the share price confirms that the government and its expensive city advisers got the pricing structure wrong and have undervalued this treasured national institution,” said Billy Hayes, the union’s general secretary. “The taxpayer has lost out immediately, and we all now face an uncertain future for our postal services, which will be run for profit instead of public service.”

The union is canvassing its Royal Mail members with the intention of calling a strike to protest the privatization of the company and to seek a new agreement on work terms and conditions. Voting closes Wednesday, and the earliest date that a strike could be held is Oct. 23.

The opposition Labour Party has criticized the Royal Mail IPO along similar lines.

U.K. Business Secretary Vince Cable on Friday defended the government’s process, saying that what matters is where the share price settles over time, and that Royal Mail now will have access to private capital with which to modernize.

“You get an enormous amount of froth and speculation in aftermath of a big IPO of this kind,” Mr. Cable said in an interview with British Broadcasting Corp. “It has absolutely no significance. What matters is where prices settle. The bulk of shares have gone to long-term institutional investors, mainly British pension funds and insurance companies.”

Mr. Cable said decisions about how to allocate shares among potential investors were made by the government’s advisers. “There was no political involvement,” he said. “We had a professional team and professional advice, and I was not going to interfere with it.”

Institutional investors snapped up two-thirds of the offer, with the rest going to retail investors, the Department for Business Innovation & Skills said.

The selloff also will create the largest employee share plan of any British privatization for almost 30 years, with about 150,000 Royal Mail employees eligible to get free shares. In total, employees could hold a combined 10% stake in the company.

The government previously indicated the shares would be priced between 260 pence and 330 pence a share, valuing Royal Mail at £2.6 billion to £3.3 billion ($4.15 billion to $5.27 billion). The government said on Thursday that it would raise £1.72 billion from the offering if an overallotment of shares option isn’t exercised or £1.98 billion if it is exercised.

Conditional trading, which lets institutional investors trade shares while the regulatory listing process is being completed, started Friday, although transactions won’t be completed until the first official, unconditional day of trading on Tuesday.

In recent days, some investment analysts have joined the Labour Party in suggesting the government may have undervalued Royal Mail. Among those, stockbroker Panmure Gordon & Co. valued the company at between £3.7 billion and £4.5 billion.

P.J. Davies, head of Quest analysis group at investment bank Canaccord Genuity Ltd., said his firm agrees that Royal Mail was sharply undervalued. “Our view is that the company is worth 599p a share—that’s an 82% upside to its 330p issue price,” Mr. Davies said. “We have a buy recommendation on Royal Mail for our institutional clients.”

Royal Mail dates back to 1516, when King Henry VIII ordered the creation of the first national postal service. In recent years, however, the company has battled the rise of the Internet and email, leading to losses in five of the past 12 years and the elimination of more than 50,000 jobs. It now handles about 58 million letters and parcels a day, down from 84 million five years ago.

The privatization of Britain’s postal service follows similar moves by some European neighbors. Austria, Germany and the Netherlands have all privatized their postal services in part or fully. In June, Belgium’s postal service, Bpost, raised €2.9 billion ($3.9 billion) in an IPO.

— Rory Gallivan, Ainsley Thomson and Nick Cawley contributed to this article.