What Lord Myners tells us about the Royal Mail sell-off shows just how good the City is at looking after itself

This is a report that leaves a very nasty taste 

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Vince Cable must be pleased. Lord Myners’s report into the Royal Mail sell-off pretty much clears the Business Secretary of the charge that he sold the Government’s 60 per cent stake too cheaply. He could have got another £180m for the shares, but not the £1bn that MPs had suggested.

But Myners’s report leaves a nasty taste. Not so much concerning Cable, but at the method. Myners is a consummate City insider; he knows exactly how its institutions work and think. I would have liked to see him delve into the darker recesses of the City, but instead I’m left thinking, he’s too close, too imbued with its practices to get angry.

What irks, for instance, is not so much that the shares were under-priced. Pricing, as Myners makes clear, is notoriously difficult, is fraught with risk. If the shares had been priced too high and the flotation had bombed, there would have been hell to pay – the ensuing row would have been worse than what actually occurred, with the repeated accusation that the price was set too low.

No, it was the way the Government wanted there to be long-term holders of the stock, post-privatisation, and identified institutions it thought would fit the bill. In fact, as Myners sets out, the Government had no means of binding them in. Once the shares were theirs they could do as they pleased.

It was decided that 16 companies would be given priority status, that they would receive large tranches of shares in the hope that they would prove to be long-term investors. Instead, because the shares soared and they could make a quick, substantial killing, 12 of them sold some or all of their allocation straightaway.

This is the bit of the Royal Mail sell-off that makes me angry. It smacks of old City ways and habits, the sort that do the Square Mile down, of institutions looking out for each other and no one else, of winks and grateful handshakes rather than a level playing field for everyone.

I want to know exactly how those lucky 16 were chosen. But Myners does not tell me. In his report, he draws a veil over how these “pilot fish” were selected. “Pilot fish are institutions with whom a seller engages at an early stage in a sale process to test potential demand and price range expectations.” In the Royal Mail’s case, they “formed a typical list, being well established institutional investors with a track record of stable and supportive investment and/or a proven record of participating in IPOs.”

It was their feedback that gave the Government the confidence to signal the intention to float. They “also informed the setting of the bottom end of the IPO price range at 260p.” This was the price which they would support despite issues such as uncertainty caused by possible strike action.

As Myners makes clear, that bottom price is crucial. “This feedback effectively anchored the range.” As he also says that, once set, likely price ranges are seldom moved upwards in IPOs in the UK.

They said 260p was the low price. Normally, 20 per cent is added, and that forms the probable range. In the event, the Royal Mail went for the usual 20 per cent and then added another 7 per cent to take account of likely dividend payments and earnings multiples. The result then, was 260p plus 27 per cent, which gave a top price of 330p.

What occurred was that the shares duly went on sale at 330p. On the first day they rose 38 per cent, eventually reaching 615p. Currently they are 401p, still a lot higher than the 330p. Cue whatever is the pilot-fish equivalent of high fives all round.

Those pilot fish, which received allocations ranging from 19.5 million shares to 5 million shares, were sitting on enormous paper gains. Four of them still are, but 12 translated paper profits into reality by cashing in their shares. 

The Royal Mail sale was co-ordinated by Goldman Sachs and UBS, leading a syndicate of seven banks, with Lazards acting as independent advisers.

The noise in my head as I read Myners’s study is one of scratching – of backs being scratched across the City. The fortunate pilot fish  are supporters of IPOs. Who would be advising on those IPOs? Would it be those very same banks that are assisting the Royal Mail?

A look at the pilot fish shows them to be major hedge funds, sovereign wealth funds and asset managers – just the sort that can be counted on to come into an IPO, and just the sort that can prop up the Royal Mail sale.

Myners hints at the discussions that must have taken place behind the scenes, between Goldman Sachs and UBS, and the 16. But disappointingly, he only hints. “We note that where there is significant oversubscription at the top of the range, decisions on allocation within the agreed allocation criteria have a greater degree of subjectivity. This has the effect of giving greater discretion to the global co-ordinators. In the case of Royal Mail this also arguably increased the strong position of pilot fish investors on the final register.”

That position, he says, was effectively their reward for “their early involvement in the process as well as their enthusiasm for the story and the perception that they were expected to provide a stable base in the aftermarket.”

Gallingly, though, the 16 did not do what was expected of them, which was to indicate their willingness to hold the shares at the top price of 330p. “The other key role of pilot fish, in providing price leadership… was not evident in the case of Royal Mail,” says Myners.

Once the shares went on sale, “the perception that they were expected to provide a stable base in the aftermarket” proved to be misplaced, with 12 of them rushing to make a stonking profit.

There’s another City phrase that springs to mind where IPOs and share allocations are concerned that also smacks of favouritism, which is “friends and family”. And there’s a word in common usage, beyond the City, that sums up the whole Royal Mail sell-off: unfair.