Royal Mail Hopefuls Said to Miss Out With IPO Pricing at Top

Tuesday, 08 Oct 2013 09:47 AM

 

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Royal Mail Group Ltd.’s initial public offering is significantly oversubscribed and many institutional investors that applied to take part will get no allotment, two people familiar with the sale process said.

Share orders priced below the maximum 330 pence risk missing out, according to the people, who asked not to be named while the IPO is under way. The stock, set to raise 1.7 billion pounds ($2.7 billion) for the government, may gain 20 percent once trading starts, according to so-called gray market prices.

Royal Mail’s privatization will be the biggest in the U.K. since British Rail was broken up in the 1990s. The IPO of the 360-year-old company, which has refocused on package-delivery markets spurred by a trend toward web-based purchasing, opened Sept. 27 and was fully subscribed within hours. The sale closes at 5 p.m. today and conditional trading commences on Oct. 11.

The level of demand has led Britain’s opposition Labour Party, which wants Royal Mail kept in state hands, to question the government’s handling of the IPO, with business spokesman Chuka Umunna saying taxpayers are getting “massively short-changed” in a “bonanza” for speculators and hedge funds.

Panmure View

Speaking on BBC Radio 4, Umunna called on the government to halt the sale “and think again,” citing Panmure Gordon research valuing Royal Mail at as much as 1.4 billion pounds above the market value implied by the top-end sale price.

U.K. Business Secretary Vince Cable has written to Umunna defending the sale strategy and saying Labour risks giving small investors the idea that Royal Mail stock is bound to rise, according to a copy of the letter released by his department.

The IPO’s original price range of 260 pence to 330 pence a share was later adjusted to no less than 300 pence, people have said previously. A sale at 330 pence would indicate receipts for the state of 1.72 billion pounds, based on 522 million shares sold, and an overall market value of 3.3 billion pounds.

Prime Minister David Cameron’s coalition government, which decided in 2011 to privatize Royal Mail, will keep as little as 37.8 percent of the shares, assuming no over-allotment options. Some 15 percent of stock may be available beyond the base offer.

‘Transformation’

The gray-market value for Royal Mail is indicated at 398 pence a share, based on the midpoint of “buy” and “sell” prices supplied by London-based IG, a spread-betting firm that offers a way of placing wagers on stocks without owning them. The notional price is up 1.02 percent today, according to IG.

One of the country’s largest employers with more than 150,000 staff, Royal Mail has shifted away from letters to more lucrative parcel handling, competing with TNT Express NV of the Netherlands and Deutsche Post AG’s DHL Express.

“Royal Mail has been undergoing a major transformation program focused on enabling the company to deliver letters and parcels more efficiently,” Panmure Gordon analyst Gert Zonneveld said in an Oct. 3 note to investors, adding that it has “passed the peak of the transformation investment.”

Based on other publicly traded postal services, Royal Mail’s valuation is “compelling” and should be in the range of 3.7 billion pounds to 4.5 billion pounds, Panmure said, so that the sale price represents “an exceptionally good entry level.”

Bookrunners for the sale are Goldman Sachs Group Inc., UBS AG, Barclays Plc and Merrill Lynch & Co., with Investec Ltd., Nomura Bank International Plc and RBC Europe Ltd. lead managers. The government is being advised by Lazard Ltd.

© Copyright 2014 Bloomberg News. All rights reserved.

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