Royal Mail privatisation report reaches a surprising conclusion - and it's good for the Government

The government's handling of the privatisation of Royal Mail has been roundly savaged - first, in April, by the National Audit Office, then, in July, by MPs on the business select committee.

Both essentially concluded that the taxpayer was short-changed to the tune of around £1 billion.

In light of the criticism, Vince Cable asked Labour's former City Minister Lord Myners to review the way the Government sells state-owned assets.

In the context of what has been said before, Myners' conclusions are surprising.

Lord Myners says Royal Mail's privatisation lessens the risk of industrial action:

He agrees that Royal Mail was undervalued, although not by anything like the sums that have been alleged.

Furthermore he makes his way onto the Business Secretary's Christmas card list in time for last post (today) by concluding that the privatisation was a "complex exercise executed with considerable professionalism".

Goodness.

The Government sold 60% of Royal Mail in October 2013 at 330p a share, raising nearly £2 billion.

But on the first day of trading the shares shot up by 38% and went on to peak, in January this year, at 615p before falling back to the current level of about 392p.

Myners says the Royal Mail issue "might have been priced a little higher" but not by much, perhaps 20 - 30 pence more.

If the taxpayer did lose out, he believes it was to the tune of between £120 - £180 million.

The Government paid a host of City advisors, overseen by Lazard, to help with the sale.

A price range of 260p-330p per share was set and "bookbuilding" began.

Goldman Sachs and UBS led a syndicate of seven banks in collecting indicative, non-binding orders from investors. The idea was to divine appetite for Royal Mail shares.

The process began on Friday 27 September 2013 and lasted eight working days. Orders flooded in on day one. The shares were immediately over-subscribed, even at 330p each.

Myners points out that bookbuilding is standard market practice, he says the process "isn't perfect" and fell short in this case.

He does suggest future modifications (digital auctions, more transparent rules) but his central view is that there was no better alternative and that the Government couldn't have done much more to extract a better price for the shares it sold.

Myners accepts that a lot of the criticisms leveled at the Government are valid.

There was limited expertise within government in managing privatisations.

When the orderly queue for shares turned into a stampede the Government could have sold a smaller stake, it could have hiked the asking price above 330p.

It did neither but, once again, Myners is sympathetic.

The "retail" offer of shares to the general public (politically desirable) restricted room for manoeuvre, as did the threat of strike action by Royal Mail's staff.

The bigger economic picture looked unpromising, the United States Government looked like it might be about to default.

Myners reminds us that Royal Mail was not an obviously attractive investment in the first place with "past losses, poor profitability and strained industrial relations".

The NAO felt Ministers were over-cautious, and Myners clearly feels they were right to be. The government had unexpected momentum and it could have easily been undone.

Lord Myners and the NAO have come to radically different conclusions regarding the sale of Royal Mail, principally because they interpret the sudden turbo-charged performance of the company's share price on flotation very differently.

The NAO saw it as proof that the government and its City advisors had midjudged demand, but Myners is much more forgiving.

On the first day of trading, 11 October, the shares closed at 455p a share. Two weeks later they were changing hands for 555p. Myners points out that a small group of investors piled into Royal Mail shares.

The Children's Investment Fund Management (TCI) - a hedge fund - bought 50 million shares in a few days - 15% of the total volume traded - forcing the price up (three months later TCI sold up).

Royal Mail's admission to the FTSE 100 shortly afterwards drove demand for shares even higher.

In Myners' words, "the aftermarket conditions were extraordinary, unpredictable and did not reflect significant value 'left on the table' as some concluded at the time."