NAO Delivers Verdict On £3bn Royal Mail Float
Vince Cable was correct to ignore investment bankers' efforts to value Royal Mail at billions of pounds more than the company was eventually privatised for, the public spending watchdog will say this week.
Sky News has learnt that the National Audit Office (NAO) will publish on Tuesday its analysis of the sale of the postal operator, which has so far generated nearly £2bn for the Government.
Sources said on Sunday that the NAO had concluded that some aspects of the Royal Mail initial public offering (IPO) could have been handled more effectively, but that the structure of such deals meant that a last-minute pricing adjustment could have resulted in the sale failing altogether.
The contents of the roughly 50-page report will be significant because they will offer a partial vindication of the stance of Mr Cable, the Business Secretary.
He has repeatedly dismissed the immediate surge in Royal Mail's value as "froth", effectively suggesting that the company has been overvalued since its October flotation.
He has faced hostile questioning by the Business, Innovation and Skills (BIS) Select Committee on two occasions since the sell-off. On both occasions, Mr Cable has insisted that the sale represented value-for-money for taxpayers and that higher valuations presented by City bankers simply reflected their desire to win a role on the prestigious deal.
Royal Mail's shares were priced at 330p on the day they were sold, valuing the company at £3.3bn, but they instantly soared as investors bet that the company would be able to improve its financial performance by cutting costs more easily as a private sector-owned business.
On Friday, Royal Mail shares closed at 564p, valuing the company at £5.64bn.
Sky News revealed last October that JP Morgan had pitched a valuation for Royal Mail of up to £9.95bn including its £1bn of debt, close to three times the level at which the Government eventually sold shares.
Other investment banks which did not ultimately work on the share sale, including Citi and Deutsche Bank, also proposed much higher valuations for the company than that settled on by Mr Cable and his advisers.
The NAO report is understood to say that the Business Secretary was correct to place little reliance on the valuations pitched by banks last summer, which were largely based on the analysis of information already in the public domain.
According to the terms of reference published by the watchdog in October, the NAO said it would conduct "a value-for-money examination of the privatisation of Royal Mail plc. The examination will cover the issues of how the price range for the IPO was set and the discussion of possible revisions to the range."
The NAO is said by insiders to have concluded that there were some flaws in the setting of the initial price range for the IPO, and that ministers and their investment banking advisers could have secured a higher price than 330p by negotiating harder with prospective buyers of the shares.
Sources said, however, that the NAO report would acknowledge the risks of revising sharply upwards the sale price because of indications from institutional investors that they could walk away if the shares became more expensive to buy.
They said that the NAO would also cast doubts on the effectiveness of the IPO process as a route for offloading assets, which could theoretically have implications for the sale of other state-owned businesses, such as the uranium processor Urenco.
The publication of the NAO report will come at a sensitive time for Royal Mail, which last week announced plans to cut 1,300 middle management jobs as part of an ongoing efficiency drive.
The company has also announced contentious stamp price increases, which come into effect on Monday, with the risk of further controversy over the remuneration of Moya Greene, its chief executive.
Mr Cable has told Royal Mail directors that he wants pay rises for top management to be limited to the same 3% increase that the rest of its workforce will receive this year.
With the Government still a 30% shareholder in the company, the Government would deliver a serious blow to the credibility of Royal Mail directors if it voted against the company's pay report at its annual meeting during the summer.
Mr Cable has not yet made a decision about how the Government will exercise its vote.
The role of the investment banks which worked on the Royal Mail sale, led by Lazard, Goldman Sachs and UBS, has also been scrutinised by the NAO.
A person close to the NAO said some banks had been engaged in a frantic lobbying effort in recent weeks to secure the removal of a recommendation in a draft of the watchdog's report which suggested that the asset management arms of banks which work on flotations should be barred from buying shares.
One said that the recommendation, which if implemented would have major consequences for the structure of such deals, was unlikely to feature in the final report.
The NAO, BIS, Royal Mail and the investment banks which worked on the privatisation all refused to comment on Sunday.
In a statement last autumn, a BIS spokeswoman said: "A total of 21 banks pitched in May for the business of acting for the Government on the sale of Royal Mail as part of an extensive procurement process. Seven were successful.
"The proposals included indicative valuations of the company based, in many instances, solely on information already in the public domain. Banks made their own assumptions of Royal Mail's future performance. The range was wide with the median around £3.6bn taking into account [an] IPO [initial public offering] discount.
"The banks' proposals came months before any threat of strike action by the unions, financial market uncertainty in the United States and other factors which the Government has already said were taken into consideration in setting a price for the company in September."
The BIS Select Committee will publish its own report on the sell-off in the next few weeks, although its cross-party membership may mean that severe criticisms are muted.