The review, commissioned by Business Secretary Vince Cable, was led by former City Minister Lord Myners, supported by an expert panel from the financial sector and academia.
The report looked at the central recommendations to come out of the National Audit Office’s report in April 2014 into the Royal Mail sale, which raised questions around the framework government currently operates under when divesting its assets via an IPO. It also looked at alternatives to the conventional book building process to inform future stock market sales more generally.
Business Secretary Vince Cable said:
I am very grateful to Lord Myners and his expert panel for this important and insightful report. It contains a number of significant proposals which could make the general process of future sales more transparent. I would encourage financial regulators and those bringing companies to market to engage in this debate. In particular they should explore how digital auctions could, in certain circumstances, make the sale process much more flexible.
I also welcome his comment that the sale was executed with considerable professionalism and that any decision to try to have priced the shares higher would have been risky. We were right not to take that risk.
The panel’s main proposals which challenge the existing way UK markets work in general include:
- publication of a prospectus as early as possible in the sale process, perhaps publishing a price range later
- enabling research by as broad a range of institutions as possible, including unconnected analysts, an approach previously supported by the Association of British Insurers
- changing the current convention whereby research analysts are bound by blackout periods to enable better investor education throughout the whole process
- considering standardised shareholding disclosure requirements for all institutions
- discussing with index providers whether accelerated entrance to indices could be more widely available
- revising withdrawal right requirements for orders made on stock, particularly as technology enables faster response times
After studying the process adopted during the Royal Mail sale, the panel recommended that before any future primary share sale by government there should be:
- a debate about how any retail sale should be conducted because of the logistical challenges it creates. This rigidity includes difficulties in offering withdrawal rights to retail investors in the event of re-pricing
- use of a more transparent and digital auction process which could discourage inflated orders
- a debate about whether assets should be sold in tranches and a recommendation that government should retain flexibility to make a final decision on the size of tranches sold until late in the process. However, the panel also recognised that government concluded that a minority sale would not have allowed Royal Mail to borrow in the external markets, a key objective of the sale
- more consideration given to innovative and international book building approaches, as there was no expectation in the UK model which was used, that price ranges would be changed during the sale process, even if clusters formed at the top or bottom of the range
- a 2 stage process to the publication of the prospectus, with a late supplementary prospectus on price once investors are better educated
- allocation criteria should incentivise pilot fishing, an important and positive part of the IPO process, but throughout the sale process, not just at an early stage
Lord Myners said:
This is a seminal piece of work which has the potential to fundamentally alter the way companies are floated on the UK stock market and I look forward to seeing how this develops.
I regard the Royal Mail privatisation to have been a complex exercise executed with considerable professionalism. Many previous governments attempted to sell but failed. The sale was done against a backdrop of global economic uncertainty and a threat of industrial action, which go a long way towards explaining the cautious approach taken throughout the process. There were also some inherent complexities built into the transaction, such as a generous retail offer, which added to this caution. The government adopted conventional standard market practices built up over time.
We have not uncovered any evidence to challenge the general assertion that an IPO price greater than 350 to 360p could have been achieved through the book build process and we accept that a decision to revise the range would have come with added uncertainty and risk. The right decisions were made.
We do not believe that a price anywhere near the levels seen in the aftermarket could have been achieved at listing. The aftermarket conditions were extraordinary, unpredictable and did not reflect significant value “left on the table” as some concluded at the time. The government and taxpayer achieved significant value.
The report also concluded that:
- a year after listing, Royal Mail shares were trading in line with their international comparators at a level that would typically be desired following a successful listing
- there are potential conflicts of interest in book building and allocation but no suggestions were made to the Panel that such conflicts were evident in the Royal Mail sale
- there were complexities in the Royal Mail process such as the government had concluded it had to sell a majority stake to enable the company to access private borrowing; and the inclusion of a full retail offer with provision for postal applications as well as online and via intermediaries made it difficult to contemplate changing the price range
Note to editors
- ‘An Independent Review for the Secretary of State for Business, Innovation and Skills: IPOs and Book Building in Future HM Government Primary Share Disposals’, is available at https://www.gov.uk/government/publications/government-shares-future-primary-sales.