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Stamp of disapproval for Royal Mail bonanza deal

    The Royal Mail flotation has wide significance
    The Royal Mail flotation has wide significance

    The widely criticised Royal Mail flotation of shares has broad significance.

    It has reflected an appetite for new equity from private investors in the UK.

    Yet, negotiators of the Royal Mail deal are guilty of under-pricing. They have cost the taxpayer in excess of £1 billion as the shares soared to a 50 per cent-plus premium.

    Goldman Sachs and UBS who led the book building of investors and investment bank Lazard, and who co-ordinated for the government, miscalculated the deal.

    Too much emphasis was placed on the proposed strike by the Communication Workers Union and not enough on the concealed Royal Mail jewels. These include its European parcels business General Logistics Systems, the value of its data collection using barcodes on the mail and a property portfolio that includes city-centre sorting offices. It is unusual for a share offer to be so mispriced — although it is more likely when assets in the public sector are sold.

    Last month’s placing of a £3.2 billion stake in Lloyds Banking Group to existing shareholders is a case in point, with the shares climbing once a market was established.

    One suspects that when the government eventually feels confident enough to start selling down its stake in the Royal Bank of Scotland, the same will happen. The evidence from the United States is that, when the Americans sold off, share stakes build up — after the great panic of five years ago, they eventually gave rise to a large premium.

    However, governments are not alone in seeking to return assets to the private sector.

    The next big offer down the slipway will come from Merlin Entertainments Group, the British attraction operator that boasts Madame Tussauds, Legoland and Alton Towers in its portfolio. An early valuation of up to £3.3 billion has been placed on Merlin Entertainments. It is putting forward retail offers and discounts that will hopefully attract families. This method of attraction was last attempted in the 1990s by Eurotunnel and Euro Disney Resort, which is now Disneyland Paris. Both companies subsequently faced financial struggles and shareholder incentives had to be scaled back. The current upsurge in share prices and the strong investor interest provides an opportunity for private equity firms to offload investments that they had hoped to sell much earlier.

    Merlin Entertainments, which is partly owned by the Blackstone Group and CVC Capital Partners, carried reported net debt of £1.2 billion at the end of 2012.

    But shareholders have been burned in the past by private equity offerings. The pre-crash floats of Debenhams and care homes group Southern Cross proved to be immensely disappointing.

    Among familiar names seeking to offload assets is Terra Firma chairman Guy Hands, who is seeking in the order of £1 billion for his renewable energy group Infinis Energy. Hands last hit the headlines when he bought EMI at the peak of the 2007 credit boom and was later forced to hand over the assets to his bankers Citigroup when debt servicing became too high. EMI has been swallowed by Lucian Grainge’s Universal Music. That experience may make investors nervous about Hands’ latest enterprise even though it is in the attractive renewable energy sector.

    The successful floats of insurers esure and Direct Line is encouraging another big insurance name, Saga, to test the market early next year. It has appointed SJT Advisors to explore the idea of an Initial Public Offering of the firm that is currently part of Acromas Holdings, which also owns the AA. Acromas has acknowledged that its original efforts to combine the two groups did not really work, despite AA’s role as a car-insurance broker.

    Another possible return to the stock market is department chain House of Fraser, which fell into Icelandic hands at the time of the country’s financial boom. Rothschild has been hired to advise on the sale. But House of Fraser may face some resistance because of the previous retail disappointments with rival Debenhams, which has taken years to recover from the private equity experience.

    Other high-street names said to be considering floats include fast-expanding discount retailer Poundland, B&M and gaming group Gala Coral.

    Investors, both institutional and private, have been hoarding cash during the downturn. But they will also be acutely aware that not all floats turn out to be as immediately profitable as the Royal Mail deal.

Alex Brummer

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