'Somebody has misled the taxpayer': Tory MP Brian Binley slams banks involved in controversial privatisation of Royal Mail
Officials from Goldman Sachs and UBS were given a grilling by MPs amid complaints that company was undervalued
Wednesday 20 November 2013
A Conservative MP today attacked banks involved in the Government's controversial privatisation of Royal Mail, claiming the deal had cost taxpayers money.
Officials from Goldman Sachs and UBS, which ran the flotation last month, were given a grilling by MPs on the Business Select Committee amid continuing complaints that the company was undervalued.
Brian Binley (Conservative Northampton South) told James Robertson, managing director of UBS, and Richard Cormack, managing director of Goldman Sachs, that he questioned the two banks' intelligence gathering operations.
The share price was set at 330p, valuing Royal Mail at £3.3 billion, but the shares jumped by over a third on the first day of trading and broke through the 550p mark within a week.
"All the advice you gave turned out not to be helpful for the taxpayer. Right from the beginning, the Secretary of State was advised it would not go above 330p. Somebody somewhere has misled the taxpayer and cost the taxpayer.
"Why do you have confidence in your intelligence gathering mechanism to suggest to the Secretary of State that you were right, when you were wrong?
"Or did the Secretary of State decide for political reasons to keep the price at the lower level in order to have a successful sale?"
Mr Binley asked whether taxpayers would be entitled to believe that the banks "were not very clever" in their job, given how much they were paid.
Mr Cormack replied that it was a large, complicated sale, against the backdrop of a threatened strike by members of the Communication Workers Union.
"This was a well executive transaction," he said.
The CWU has said any further payments should be withheld on the basis that banks undervalued the company.
General secretary Billy Hayes said: "Hundreds of millions of pounds of taxpayers' money have been lost because of the failure of the Government and its advisers to accurately value the company. In other situations this would be gross incompetence or even theft. Private shareholders have lined their pockets at the expense of the taxpayer following the huge leap in the share price.
"At the very least the institutions which advised the Government should not receive any further payments - which are discretionary. Serious consideration should be given to claiming back fees paid for shoddy advice which has left the client - the taxpayer - out of pocket."
After an hour of exchanges between MPs and the bankers, Mr Binley said: "I thought this might have been a political plan to keep the price down and ensure an effective, successful sale.
"The more I hear, I am beginning to suspect your intelligence gathering operation."
Committee chairman Adrian Bailey (Labour, West Bromwich West), said that from a lay person's point of view, it would appear that either the banks were misled by the organisations they consulted prior to the sale of shares, or they misled the Government.
Mr Robertson said it was clear to the banks advising the Government that investors would not pay more than 330p per share, especially as there were 600 million shares to be sold.
Mr Bailey: "So you were misled?"
Mr Robertson said if people had subsequently bought shares at a higher price "obviously they could have said something" beforehand.
Mr Bailey: "I think my case is made."
Mr Robertson also told the MPs that the threat of a strike by the CWU had an impact on the price people were prepared to pay for shares.
"The investor view of what they were willing to pay was coloured by that."
Mr Cormack, agreed, saying: "The feedback we had was that industrial relations certainly impacted on the price people were prepared to pay."
That feedback was passed on to Business Secretary Vince Cable, MPs were told.
Mr Robertson later said the industrial action threat was the "most significant factor" in the weeks before the flotation.
"Up to September we were hoping to get a pay deal and to do the IPO (Initial Public Offering) against a backdrop of positive industrial relations."
The committee chairman said he found it "amazing" that the bankers had not mentioned the impact of the industrial action threat until they were specifically asked about it by MPs.
Royal Mail shares fell below 550p today as a note from analysts at UBS advised investors to sell, after a strong run which has seen them climb near to 660p - from their initial offer price of 330p last month.
The analysts said they expected revenue growth and improvements in productivity but said they believed the market was over-estimating the group's prospects and was overvalued. They targeted a lower price of 450p.
Mr Binley questioned whether the City figures had "failed the taxpayer" by not setting a higher price.
He said: "Do you feel disappointed that you have let the taxpayer down?"
Mr Cormack told him: "I feel that we executed the transaction well and in the interests of the taxpayer."
Mr Cable, who will appear before the committee next week, has described the sharp increase in the share price following flotation as "froth and speculation".
But Gert Zonneveld, of Panmure Gordon said he expected the price to rise even higher over the coming months.
He said: "I do not think it is froth. These shares have been trading on the market for nearly six weeks, several hundred million shares have traded hands. Today's value of the company is the value that the market attributes to it."
Mr Zonneveld said he had given the shares a "target price" of 570p over a 12 month horizon.
Labour committee member Willie Bain asked whether it had been wise to advice Mr Cable against increasing the offer price.
Mr Robertson told him: "Hindsight is always easier to judge these things (in). When we were sitting there on the Friday, over the weekend, Monday the 7th and Tuesday the 8th and we were discussing things in detail, because we didn't take the chance of getting more money for taxpayers lightly at all, when we were looking at all the risks and comparing that against where we thought we could increase the price to, on balance we chose to stick with 330p and execute it then."
Mr Bain asked him: "Was that an assessment that was shared by the Secretary of State, did he specifically discuss that proposal with you?"
Mr Robertson said the issue had been discussed with the shareholder executive and independent advisers Lazard and "they discussed that with the Secretary of State".
One of the biggest investors in Royal Mail has been Singapore's Government Investment Corporation (GIC) and Mr Robertson defended the decision to target sovereign wealth funds among 65 potential investors.
He said sovereign wealth funds were "very big asset managers" and "entirely appropriate people for the company to go and meet and market the company"
The witnesses were asked whether the Government should sell its remaining 30% stake in the Royal Mail once the six month lock-up period expires.
JP Morgan's John Mayne said: "If the equity market was strong and the share price was deemed to be fair then there would be a debate about when was a good time to sell shares, and it might well be then ... I would be asking the Government what their intentions were and what their aims were but, certainly, on the outside looking in, it could be that advice (to sell), yes."
Billy Hayes, CWU general secretary, said: "It's clear from today's select committee that Royal Mail was undervalued and the Government and taxpayer were misled.
"These advisers should not be paid any additional discretionary fees for the shoddy advice they provided, which has lead to the taxpayer losing out on hundreds of millions of pounds in lost assets.
"It's also clear that the Government has used strike action as an excuse for the share price rise - today's evidence shows that the impact of potential strike action has been vastly overplayed.
"When being asked to explain the valuation, not a single banking representative mentioned it. It was only 45 minutes into the session, when asked a direct question, that any of the bankers brought it up. Hardly 'the main factor'.
"No evidence was given to support the assertion that potential industrial action had an impact on the share price, other than a comment that 'some investors indicated they would be unwilling to invest'. That doesn't tell us how many or how significant it was and not a single representative could put a figure on how much that may have altered the share price by.
"It's weak in the extreme and suggests that the whole truth has not been told, especially given that shares were oversubscribed by 20 times, surely because investors could see it was a giveaway.
"Vince Cable will have important questions to answer next week following these revelations."
Shadow trade minister Ian Murray said: "There are real concerns that taxpayers have lost out to the tune of hundreds of millions of pounds as a result of ministers' botched Royal Mail fire sale at a time when families are struggling with a cost-of-living crisis of David Cameron's making.
"Vince Cable has dismissed these concerns as 'froth' but this is looking less credible by the day and he has serious questions to answer. We now know he considered the option of a higher price and discussed this with banks but subsequently rejected this option. He needs to explain to the committee next week why this happened and whether political considerations played a role.
"Evidence this morning highlighted that major banks including Citibank and JPMorgan, alongside Panmure Gordon, valued Royal Mail significantly above the price at which it was sold."
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