Royal Mail May Have Been Undervalued

By Mark Kleinman, City Editor

JPMorgan told the Government earlier this year that it believed Royal Mail could be worth up to £10bn, including its debts, ahead of the postal operator's privatisation.

Sky News has learnt that corporate financiers from the Wall Street banking giant presented a spectrum for Royal Mail's value ranging from £7.75bn to £9.95bn - the top end of which was more than two-and-a-half times the price at which ministers ultimately sold shares in the company in the most important state asset sale for decades.

The Government sold shares in Royal Mail for 330p each earlier this month, valuing the company's equity at £3.3bn.

Including its roughly £800m of net debt, the privatisation effectively attributed an enterprise value to the company of £4.1bn, above the average valuation of £3.6bn ascribed to it by the nearly two dozen firms which pitched to advise on the sell-off.

The revelation of JPMorgan's valuation of Royal Mail will fuel the controversy over whether Royal Mail was undervalued by the Coalition.

The bank valued the Royal Mail from £7.75bn to £9.95bn, Sky News learns

However, it will also lend credence to those who have argued that many of the banks which participated in the process argued for unduly optimistic valuations for a company facing the twin pressures of industrial action by staff and a sharp long-term decline in its core letters delivery business.

Cabinet ministers including Vince Cable, the Business Secretary, and George Osborne, the Chancellor, have lined up to defend the price of the sell-off following an immediate surge in Royal Mail's share price in the hours after it floated.

Moya Greene, Royal Mail's chief executive, has also backed the Government's stance, endorsing Mr Cable's view that the share price would settle once the hype surrounding the sale had subsided.

Sky News also understands that Citi and Deutsche Bank also pitched valuations well above the £4.1bn point at which the shares were sold, according to sources at those banks and in Whitehall.

Insiders said that Citi had suggested an upper valuation of £7.3bn, while Deutsche Bank argued that Royal Mail could be worth between £6.4bn and £6.9bn.

Neither Citi, Deutsche Bank nor JPMorgan were appointed to work on the privatisation.

A number of other firms among the 21 which pitched are said to have suggested that Royal Mail was worth much less than the £4.1bn enterprise value at which it was sold, underlining the divergence of views about it.

A Department of Business spokesperson 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' appointment process was overseen by Lazard as independent advisors to Government.

"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."

George Osborne defended the price of the sell-off

The broad range of valuations presented by bankers is likely to be the focus of a forthcoming probe by the National Audit Office, which is a conventional step following major privatisations.

In a statement on Wednesday, the National Audit Office said: "Given the scale and significance of what has been the first public offering for many years of shares in a publicly owned company, the National Audit Office will be conducting a value for money examination of the privatisation of Royal Mail.

"The examination will cover the issues of how the price range for the initial public offering was set and the discussion of possible revisions to the range."

The Business, Innovation and Skills (BIS) Select Committee is also examining the privatisation, with Mr Cable and executives from Lazard expected to testify before the Committee on November 20.

Mr Cable last week wrote to the Committee to say that some leading institutional investors had threatened to withdraw their orders for shares if the Government sought to raise the sale price at a late stage of the process.

Bankers often pitch excessively high valuations for companies when they compete to advise on flotations and takeovers in order to ensure they win a slice of the business.

In Royal Mail's case, however, insiders pointed out that it was crucial for the Government to successfully float the company, or "price it to go" in City parlance.

Royal Mail shares were initially listed at 330p

They said it would have been disastrous if the IPO had had to be abandoned, partly because of the embarrassment for ministers and also because it would have ended the prospect of the privatisation taking place before Royal Mail's workforce could go on strike.

Another banker who worked on the deal said that a much higher sale price, followed by a poor after-market performance, would have been more damaging for ministers and incurred a much broader public backlash from those who bought shares.

The Government's remaining stake is now worth just under £2bn and is likely to be sold next year.

Investors who acquired stock in the privatisation have either booked healthy profits or are now sitting on handsome gains following the rise in the share price.

One Whitehall source added that documents published earlier this year showed that the valuation attached to Royal Mail was not one of the key determinants of the Government's decision-making process when appointing bankers to work on the privatisation.

Among the factors that were used to select the banks, they said, were understanding Royal Mail's "equity story" as well as key investor risks such as the feasibility of an IPO and the company's capital structure requirements.

The quality and breadth of their ability to target investor, and relevant prior transaction experience including with the Government were also taken into account, as were banks' proposed fees for working on the transaction.

The row was stoked further this week when the Government was criticised over the disclosure that The Children's Investment Fund, an investor with a track record of corporate agitation, had emerged as Royal Mail's largest private sector shareholder.

Royal Mail shares were trading in London on Thursday morning at around 530p, valuing the group at about £6.1bn including net debt.

A spokeswoman for JPMorgan declined to comment.

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