UK: Royal Mail share price soar 36%

Business Secretary Vince Cable has defended the Government over claims it has sold off Royal Mail to

Business Secretary Vince Cable has defended the Government over claims it has sold off Royal Mail too cheaply. - Credit: PA

Shares in Royal Mail rose by more than a third when they began trading on the stock market today, increasing the value of the business by more than £1 billion.

A row has erupted as the value of shares in newly-privatised Royal Mail soar

A row has erupted as the value of shares in newly-privatised Royal Mail soar - Credit: PA

The sharp rise of 36% from the 330p offer price to as much as 450p meant 690,000 ordinary investors who have each bought around £750-worth of stock gained more than £270 each.

Royal Mail shares have soared in value

Royal Mail shares have soared in value - Credit: PA

The Government announced yesterday that 95% of all applicants for the heavily-oversubscribed offer had picked up stock.

Shares were sold at the top end of the price range set by the Government, valuing the company at £3.3billion, but a rise to 450p implies an increase to £4.5 billion.

The surging price is likely to renew claims that ministers have sold off public assets too cheaply. The privatisation of a 52.2% stake in Royal Mail has initially raised £1.72 billion for the Treasury.

Last night the Government said that all retail investors who applied for between the £750 minimum allocation and £10,000-worth would receive a tranche of 227 shares worth £749.10.

But many hoping for a bigger slice of the company were left disappointed after retail investors who applied for more than £10,000-worth got none after the offer was seven times oversubscribed.

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A third of the sold-off stake - excluding a 10% chunk being given free to 150,000 Royal Mail staff - has been allocated to the general public.

The remainder has gone to big institutional investors such as pension funds, insurers and hedge funds. The institutional offer was more than 20 times over-subscribed.

Taxpayers have been left with a 37.8% stake in the company, although this could be reduced to 30% depending on a so-called “over-allotment” option, which is dependent on price performance following the flotation.

Business Secretary Vince Cable said that the sell-off was a “very good deal” for Royal Mail workers, for the country and for the Government.

He dismissed suggestions that the sharp rise in Royal Mail share prices proved the company was undervalued.

“You get an enormous amount of froth and speculation in the aftermath of a big IPO of this kind,” Mr Cable told BBC Radio 4’s Today programme. “It is of absolutely no significance whatsoever.

“What matters is where the price eventually settles. If we look back at this in three months or six months’ time or years to come, that’s what we are really interested in.

“The bulk of the shares have gone to long-term institutional investors, stable investors, some overseas investors but mainly British pension funds and insurance companies who are there for the long term.

“The objective of the exercise, which fits in with what we want for the Royal Mail, is to make sure it has stable, long-term investors.”

He added: “From the point of view of the Royal Mail, we are interested in helping this institution to survive and compete in a very difficult market. They have lost a lot of their business because of email. They have got to raise a lot of private capital in order to invest.

“They could only do this from private markets. They can’t get the money from Government, so that’s why we have had to do this privatisation.”

But the general secretary of the Communication Workers Union, Billy Hayes, described the sell-off as “a tragedy” and predicted that it would make “not one scintilla of difference” to employees’ intention to vote for strike action next week.

Mr Hayes told Today: “This is a sham, really. The company has been under-valued... It’s basically David Cameron rewarding his mates in the City. Vince Cable, one of the cleverest men in British politics, has made one of the stupidest decisions he is ever likely to make as a politician.

“It’s a tragedy. This company is nearly 500 years old and it’s being privatised for no reason.”

Mr Hayes acknowledged that the vast majority of Royal Mail staff have accepted shares in the privatised company, but said that this did not reflect enthusiasm for the new arrangements.

“I don’t know anyone in austerity Britain who is going to refuse free money,” he said. “They’ve been given these free shares, but the real test of whether the staff are happy with this privatisation will be next Wednesday, when we expect to declare a Yes vote for strike action to defend their terms and conditions.

“There’s no celebrations in delivery offices round the country today. There’s a real fear that privatisation will lead to what’s happened in other utilities that have been privatised - things getting worse, reduced services and higher prices for the consumer.”

Today’s shares launch was the first day of conditional trading - when in theory trades could be null and void in the unlikely event of the sell-off being cancelled. During this period, City institutions can buy and sell shares between each other.

General investors will not be able to cash in on their shares until next Tuesday when full trading begins although those who applied for shares through brokers offering conditional dealing will have been able to trade from today.

Joe Rundle, head of trading at ETX Capital, called the surge in Royal Mail shares a “dazzling stock market debut”.

But he said in future negatives such as the threat of industrial action, a lack of adequate capital and unclear growth strategy could weigh down the stock price.

MPs have voiced concern that the sell-off will be highly lucrative for speculators, hedge funds and investment banks rather than the public.

Next week, results of a ballot of Communication Workers’ Union members are expected to back industrial action over issues linked to privatisation.

Demonstrators dressed as robbers were protesting over the share sale outside the Stock Exchange today.

Royal Mail insists the flotation will give it flexible access to private capital and be a positive for the universal postal service.