Investment banks to be asked in Commons why sale of asset favoured foreign investors and if float price was set too low
The investment banks tasked with allocating shares in last month's controversial Royal Mail float face a grilling by MPs over allegations they discriminated against UK pension funds and favoured foreign investors.
Goldman Sachs and UBS led an offer that has been widely criticised for short-changing taxpayers by selling a major government asset on the cheap, after Royal Mail shares immediately soared on the stock exchange and continue to trade at a premium of around 70%.
Those concerns have been exacerbated by the presence of sovereign wealth funds – including Kuwait, Singapore and Abu Dhabi – on the Royal Mail's share register.
One senior City source, who has worked on major UK privatisations, said: "The Royal Mail was probably a bit cheap, but it is one thing to sell it at a cut-price to UK pension funds … There was a disproportionate amount of shares that went to sovereign wealth funds."
Senior representatives from Goldmans and UBS will appear in parliament next Wednesday to answer questions from MPs on the business, innovation and skills select committee, alongside peers from JP Morgan, Citibank, Deutsche Bank and stockbroker Panmure Gordon.
The MPs' concerns over the flotation are echoed by City figures. A top UK fund manager said: "A lot of people were very upset at their allocation, even on day zero before the shares started trading at a premium.
"It may be that the advisers did not take account of the political implications and do as good a job as they could have done."
A source close to the committee confirmed: "This is something the committee is aware of. It may well come up in the session."
In the months running up to the privatisation, it is understood that Royal Mail, the government and its advisers were working with a small group of financial institutions in order to get an early idea of how the shares should be priced.
That inner core of investors, which is thought to have largely excluded top UK pension fund managers, ended up with the most sizeable allocations.
Among the top three new investors in Royal Mail are GIC Private, formerly known as the Government of Singapore Investment Corporation, which has a 4% stake, and Kuwait Investment Office, which holds 1.42%. Meanwhile, Abu Dhabi Investment Authority has 0.09%, according to the financial data provider Thomson Reuters.
However, Royal Mail's new owners also include a string of financial institutions, including the likes of UBS (Luxembourg) SA, which own shares on behalf of anonymous clients including sovereign wealth funds. Royal Mail's official share register fails to provide further detail on its new owners, as virtually all shareholders are hidden behind nominee accounts. Neither Goldman Sachs nor UBS would comment on how they had allocated the shares.
The key focus of the BIS committee next Wednesday, however, will be the valuation assigned to Royal Mail, which was largely set by salesmen from Goldman Sachs and UBS, in conjunction with the government and its adviser, the investment bank Lazard.
Shares in the postal service floated at 330p and immediately soared, something that had been predicted by a number of City analysts not working on the float, who are forced to calculate valuations without the breadth of information provided to official banking advisers.
Royal Mail shares closed on Thursday at 557p – an increase of more than £2.2bn on the company's flotation value.
Gert Zonneveld, co-head of research at stockbroker Panmure Gordon, said in early October that he was convinced the government's official valuation of Royal Mail at £2.6bn-£3.3bn - or 260p-330p a share - was a significant undervaluation, giving his initial range of £3.7bn-£4.5bn. "I'm so convinced they [the government] got it wrong," he said. "I think they're more than £1bn too low."
A subsequent Zonneveld note after the shares had been floated then valued Royal Mail at £5.7bn, or 570p a share.
Perhaps equally embarrassing for the government is the £6bn valuation put on the company in early October by a computer programme called Quest, which is run by the investment bank Canaccord.
Quest was designed by Terry Smith, the outspoken boss of the City brokerage firm Tullett Prebon, where Michael Fallon, the minister of state and one of the key government figures leading the float, sat on the board for eight years.
Vince Cable, the business secretary, will appear in front of the committee on 27 November, accompanied by a representative from Lazard.
One City source described the suggestion that sovereign wealth funds were favoured by the banks out of expediency as "overly cynical", as they were large, long-term investors in many shares listed on the London Stock Exchange.