The truth of the Royal Mail sell-off? The taxpayer was taken for a ride

Twelve of the Lucky 16 sold their holdings immediately
  • @c_blackhurst

A sixth-former I know was doing some work experience at firm of City stockbrokers. When I asked him what he’d been doing, he said he could not say. Eventually, after a bit of cajoling, he said he had been allocating shares on an IPO against a list of “friends and family” shareholders – and the broker had told him not to tell anyone.

For some reason – I can’t think why – this memory entered my head when I contemplated the recent Royal Mail share offering. We now know that 16 investors had preferential treatment in last October’s privatisation. They were given a larger allocation of shares than others, in the expectation that they would prove to be dependable, long-term investors. Sixty per cent of the Royal Mail was sold at 330p a share. The shares rose more than one-third on the first day of trading, costing the taxpayer a potential £750 million gain. The shares are now £2 higher at 529p.

Twelve of the Lucky 16 sold their holdings immediately – something postal workers could not do, since they were required to keep their shares for three years. When Ed Miliband highlighted this anomaly, David Cameron, tellingly, didn’t address the point directly, choosing to brush it off with the Royal Mail now being “in the private sector, making money, succeeding for our country, and its employees are now shareholders”.

They are, Prime Minister. They’re stuck. But hey, let’s hope the shares remain buoyant so they too can follow the 12 and enjoy the profits of their labours.

Who were these 16? Four were hedge funds (three of them based in the US), not exactly known for sticking with businesses through thick and thin. The three US hedge funds have not hung around – they’ve cashed in and are long gone.

Another member of the 16 to have left the share register is Lazard Asset Management or LAM. Now, read this carefully: LAM is the investment division of Lazard, the Government’s adviser on... the Royal Mail sell-off. LAM made an £8 million profit from selling its allocation.

Lazard helped the Government to set that controversial 330p offer price. Alan Custis, head of UK equities at LAM, had a different figure in mind for what the Royal Mail shares were worth: he said 395p. That was his “target price”, after which he’d think about selling. In fact, such was the speed of the rise, he sold out at 470p.

Of course, there is no way on earth that one arm of Lazard knew what the other was thinking. They have Chinese walls for that sort of thing. And don’t even begin to imagine that William Rucker and his team at Lazard were capable of executing the same arithmetic as their colleague, Custis.

For angry reaction I turned to an MP, a veteran at denouncing economic short-termism and greed. He even once wrote a book explaining the origins of the last financial crisis. Some of his most excoriating criticism was reserved for investment banks and hedge funds, which he argued, did not bear enough risk. And he proposed hitting the banks with a punitive tax on their profits because in his eyes they were making too much money too easily.

Unfort-unately, this MP is harder to track down these days. That’s because he holds high office, as Business Secretary. In that role, Vince Cable – for it is he – oversaw the sale of the Royal Mail.

The Vince response to the criticism is that he was damned if he did and damned if he didn’t. Damned if he sold the shares too cheaply and investors made a killing; damned if he priced them too dearly and nobody wanted them.

That’s true. But only to an extent. He could have set a higher price – presumably doing the maths along the lines of Custis at LAM. He might have required the 16 to hang on to the shares for longer. Cable may have exercised greater scrutiny over membership of the 16, forcing them to be traditional UK long-hold institutions, rather than foreigners and hedge funds. And it was in his power to tell Lazard and LAM that one had to go: they could advise or be one of the 16, but not both.

All that would have gone some distance towards lessening the furore. If Cable had still been on the opposition benches I suspect he would have argued as much.

I believe, as well, he would have gone further, accusing the Government of “not getting” the City, of being blinded by persuasive, smooth-talking bankers and brokers, and not seeing the reality, and the potential political fallout. Vince, as a former chief economist at Shell, should have known that everything in the City has a price attached to it.

This number is always there, in the background. A chairman of a listed company receives a bid approach. What’s the first thing he does? Wonder about how many jobs are under threat, whether the bidder has similar standards and values? Not a bit of it.

His instant reaction is to see how the price compares with the one he carries around in his head, the one he’s consulted his major shareholders about and that they’ve also got at the back of their minds as being the firm’s true worth. Then, if it falls far short he will issue a statement condemning it as derisory, and he will wait for the other side to raise the offer.

There may be plenty of noise surrounding the possible takeover – involving loss of history, tradition, and potential job cuts – and while he will go along with that, his advisers will be making sure he focuses on the target price.

That’s how the City works. It’s  not interested in emotion and politics; its view is always dispassionate and calculated.

So, when he appeared before MPs this week, Rucker annoyed them with his apparent boredom and insouciance. He gave the impression of not being bothered what they or we, the little people, thought.

Like “friends and family”, the City has a phrase for yielding a quick buck on a share issue: stagging. That’s what the 12 did – they stagged the Royal Mail.

How times change. How I wish Vince the MP was standing in the Commons waving his papers, sitting on Question Time, pointing an accusing finger. Instead, I suspect that whatever he says, deep down, Vince the minister realises that the taxpayer was taken for a ride and he could have done a whole lot better.