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CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 710-ii
House of COMMONS
TAKEN BEFORE the
Business, Innovation and Skills Committee
Royal Mail Privatisation
Wednesday 20 November 2013
John Mayne, Ben Story, Gert Zonneveld, James Agnew, James Robertson AND Richard Cormack
Evidence heard in Public Questions 118 - 232
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Taken before the Business, Innovation and Skills Committee
on Wednesday 20 November 2013
Mr Adrian Bailey (Chair)
Mr William Bain
Mr Brian Binley
Mr Robin Walker
Examination of Witnesses
Witnesses: John Mayne, Managing Director, UK Client Coverage, JP Morgan, Ben Story, Head of UK Investment Banking & Broking, Citi, Gert Zonneveld, Managing Director, Co-Head of Research, Panmure Gordon, James Agnew, Chairman of UK Corporate Broking, Deutsche Bank, James Robertson, Managing Director, UBS, and Richard Cormack, Managing Director, Co-Head of Equity Capital Markets, Goldman Sachs, gave evidence.
Q118 Chair: Good morning. May I thank you for agreeing to come here today to answer our questions? We are fractionally early, but I want to maximise the time available. Before we start to question you, please introduce yourselves and the organisation that you represent, going from you, John, in order to check on voicetranscription levels.
John Mayne: Good morning. My name is John Mayne. I am a Managing Director in the UK investment bank of JP Morgan.
Ben Story: Good morning. My name is Ben Story. I am a Managing Director at Citi. I am Head of UK Investment Banking and Broking.
James Robertson: Morning. James Robertson from UBS.
Richard Cormack: Richard Cormack from Goldman Sachs. I am CoHead of European Equity Capital Markets.
Gert Zonneveld: Good morning. Gert Zonneveld, Managing Director and Co-Head of Research at Panmure Gordon.
James Agnew: I am James Agnew from Deutsche Bank. I am the Chairman of Corporate Broking.
Q119 Chair: Thanks very much. We would not normally have six people on the same panel, but there were some advantages in doing so. However, the problem does come that if everybody wants to answer every question at length, we could be here for a very long time. There will be divergent opinions, and the Committee wants to hear those opinions, but do not feel, if you have nothing to add or subtract, that you need to answer every question. Indeed, some questions will be personspecific.
May I just start with a fairly general question, really about the process? In theory this is to all, although it may well be that not everybody needs to add to it. Goldman Sachs is probably the appropriate lead on this. What was the bidding process to become the Government’s Global Co-ordinators? Could you just take us stepbystep through it?
Richard Cormack: Sure. The Government went through a formal tender process during the month of May for the selection of the Global Co-ordinators, bookrunners and syndicate. That was sent out to a broad number of banks. Those banks replied to that tender with a formal written submission, and a number of banks were then invited to an interview with the Government and their advisers, on which the selection was made.
Q120 Chair: At the point of the tender process, on what criteria were the Government judging which banks they would allocate the role to?
Richard Cormack: Their selection was based on a number of criteria. It was based on an understanding of the company; our experience and track record in executing similar large, complex transactions; our perspectives on who the buyers would be and the strength of our distribution platform in order to place those shares; and our overall capabilities in that regard.
Q121 Chair: This may be a question we will ask the Government and they are better positioned to answer, but was there any reason why the Government could not have gone for a different process-say a Dutch auction? Can you think of any?
Richard Cormack: The selection process that the Government went through for the selection of banks was in line with the procurement policies of this Government and also with the procurement policies of other Governments around the world in terms of how global co-ordinators and advisers are mandated. They had an independent adviser on board to help vet that selection process as well.
Q122 Chair: You have said yes, it was the Government’s preferred process and it was consistent with others, but were there any reasons why another process could not have been adopted?
Richard Cormack: I do not know if legally there were any constraints. Certainly in terms of market practice, this is the way in which banks tend to get selected. It allows for both a qualitative and a quantitative assessment of the organisations.
Q123 Chair: But I believe some IPOs have been done by a process of Dutch auction. Do you know of any?
Richard Cormack: Not of a Dutch auction per se.
Chair: Or a similar process.
Richard Cormack: Different organisations and different issuers will select banks using different methodologies. They will have different priorities in making their selection.
Q124 Mr Binley: Mr Robertson, tell us how much you were paid when you won this bid.
James Robertson: The seven banks that were appointed were paid in total £13 million.
Mr Binley: £30 million?
James Robertson: 13.
Mr Binley: 13. Good God, I thought that was a bit expensive. 13-thank you.
Q125 Chair: Can I just continue this? In relation to the bids, did you have separate discussions with either or all of Royal Mail, the Shareholder Executive or the Ministers?
Richard Cormack: Our tender went into the Shareholder Executive, who were running the selection process. At the interview for the transaction, representatives of the company management were also present, but, again, it was the Shareholder Executive who made the appointment.
Q126 Chair: Does anyone else have anything to add on that? Did the tender process involve fees just for your company, or did it involve an assessment of valuation as well?
Richard Cormack: The submission was wide-ranging. It involved our views on the company and on how we would envisage positioning the company for investors; our views on valuation; our views on who the buyers of the transaction would be and the amount of demand we believed we could generate; and it did include a fee proposal. However, it was a wideranging proposal and each element was scored differently by the Government and their advisers.
Q127 Chair: Obviously, UBS were involved. Any other representatives here, did you put in any bids?
Ben Story: Yes, Mr Bailey, we put in a bid, but it was unsuccessful and we did not get through to the second round, which was an interview.
Q128 Chair: Do you know why? Was a reason given?
Ben Story: We did get some feedback from the Shareholder Executive afterwards. We were told that it was a very competitive process and this time round we simply had not put forward a bid that was compelling enough for them.
Gert Zonneveld: Panmure Gordon also submitted a bid and, equally, was unsuccessful. We failed to make it past the first round as well. I have not been given any reasons as to why that was the case.
Chair: You have not been given any reasons, in your case.
Gert Zonneveld: I, as an analyst, on my side of the fence, have not been given any reasons. It is possible that our Corporate Finance department may have been given a reason, but I am not aware of it.
James Agnew: We also submitted a bid and, to our regret, we were also unsuccessful. We were called for interview.
John Mayne: The same is also true of JP Morgan. We were not called for interview.
Q129 Chair: In your bids, did you include valuations?
James Agnew: Yes we did.
Chair: Were they above or below the final determining valuation?
James Agnew: Our valuation was £5.50 to £6, at the middle of our range.
John Mayne: At JP Morgan, we were at £6.80 to £8.50-£6.8 billion to £8.5 billion.
Ben Story: At Citi, we were at £5.9 billion to £6.5 billion.
Chair: So there were a range of valuations put in at, if you like, the preliminary tendering stage, and you submitted them. Thank you.
Nadhim Zahawi: Mr Mayne, what was your valuation?
John Mayne: It was £6.8 billion to £8.5 billion for the equity.
Q130 Nadhim Zahawi: Can I just ask those who did bid and were unsuccessful: we have heard from Mr Robertson that the payment was £13 million. What were your bids at? Can you tell us what you bid?
John Mayne: Do you mean in terms of fees?
Nadhim Zahawi: Cost-fees.
John Mayne: We bid a base fee of 0.45% and an incentive fee of 0.45%.
Nadhim Zahawi: What is that in pounds?
John Mayne: On the amount that was raised, if it is the same measure that was used before of £1.4 billion, it would have been about £6.3 million for the base fee in total to the group.1
James Agnew: We bid on the basis of a 0.5% gross spread split between a base fee and an incentive fee.
Nadhim Zahawi: What is that in pounds?
James Agnew: At the mid-point of our range, that would have been £16 million.
Nadhim Zahawi: Mr Zonneveld?
Gert Zonneveld: Yes. I sit on the research side and we have Chinese walls that separate the two, so I do not get involved in any fee discussions or negotiations. That is done by our Corporate Finance department.
Nadhim Zahawi: Can you get them to write to us and tell us what that is in pounds?
Gert Zonneveld: Yes, I can, and I will.
Nadhim Zahawi: Mr Story?
Ben Story: We had a base fee of 0.75% and an incentive fee of 0.25%, so 1% in total if the incentive had been paid. If that is on £1.4 billion, then it is £14 million. That would be for the entire syndicate, though, not for an individual bank.
Q131 Nadhim Zahawi: Gert, you have been very vocal about this and have made your valuations public. Can you share with the Committee what expertise Panmure Gordon have in billionpound IPOs? How many of those have you done in the last five years?
Gert Zonneveld: I do not have the numbers in my head as to which IPOs we have done over the past five years. What I do as an analyst is value companies. I have been doing this now for nearly 20 years. Even though the valuation approaches can change depending on the company, fundamentally there are similarities in how you value companies.
Nadhim Zahawi: But is Panmure Gordon a specialist in midcap or large cap?
Gert Zonneveld: We do the whole range, so we are size agnostic, but our core strength is in the smalltomidcap area.
Nadhim Zahawi: So how many billiondollar IPOs have you done in the last year?
Gert Zonneveld: It will be several, but I will have to come back to you on the exact number.
Chair: I believe I am right in saying that on the Panmure Gordon website there is a list of IPOs.
Nadhim Zahawi: Yes, but not billiondollar IPOs. That is what I want to know.
Chair: It is a legitimate question.
Nadhim Zahawi: Their market cap, Chairman, is about £26 million.
Gert Zonneveld: We have been involved in several significant IPOs in recent times, including Just Retirement and another insurance company that was floated recently, which was also of a significant size. We have been involved in several.
Nadhim Zahawi: Over £1 billion.
Gert Zonneveld: Well, you are mixing up pounds and dollars.
Chair: Mr Zonneveld, some of us are a bit older than the others and are having difficulty in hearing. If you could speak more loudly, that would be helpful.
Gert Zonneveld: Apologies, yes. The point I was making was that I do not have the exact numbers with me, but I will make sure that you get the information as to how many $1 billionplus IPOs Panmure Gordon has been involved in.
Q132 Nadhim Zahawi: I have one final question, Chairman; I beg your indulgence. At today’s share price, if the Government had taken JP Morgan, Citi or Deutsche’s valuations, the shares would be trading at a discount, i.e. the IPO would have been a failure in the eyes of those who bought shares.
James Agnew: The price I last saw was £5.50. That is at the bottom end of our range.
Nadhim Zahawi: So it would have then appeared to be overvalued if the Government had gone with you. That is my question.
Chair: Can I just intervene? We have got questions covering that, and we will move on to them in some depth in a moment.
Q133 Paul Blomfield: Perhaps to help us understand the context of the discussion you have just been having with Nadhim, I wonder if you could explain to us what the standard forms of payments are for Global Co-ordinators-whether it is normally a lumpsum fee or it is normal to have incentives and performance bonuses.
Richard Cormack: It is typical-in fact, almost unanimous market practice-that the Global Co-ordinator and, indeed, the syndicate commissions are paid as a percentage of the proceeds raised. There typically will be-not in all cases-a basefee component and an incentivefee component, and the basefee component is typically between twothirds and threequarters of the overall fee.
Paul Blomfield: So your fee is determined by the share price postflotation.
Richard Cormack: Our fee is determined by the price that we achieve and the size of deal that we achieve. In essence, we are incentivised from a fee perspective to do as large and as highlypriced a transaction as we can.
Q134 Chair: I need to clarify that: "to get the highest price". Could it be that there is an incentive in doing an initial low valuation in order to generate a lot of interest and get a high price?
Richard Cormack: First of all, our objective in any transaction is to get a balanced price whereby we get a fair price at IPO but one that is not a failure in the context of the stock trading down in the aftermarket. There is no incentive for us to pitch a low price and then deliver a higher price; our incentive is to be realistic throughout the process.
Q135 Mike Crockart: We have heard from the others about what their bid structure was. I want to focus more on UBS and Goldman Sachs about this particular bid. Can you just break down what your bid was for this?
James Robertson: In terms of our proposed valuation?
Mike Crockart: Yes.
James Robertson: We had the context of having been working with the Royal Mail and the Shareholder Executive for many years beforehand, so we had a pretty full understanding of the risks of the company and of the opportunity. Our initial valuation of the company was £3.1 billion, with an upside of £4.6 billion if some of the risks that we saw in the company were ameliorated through marketing the company well and whether or not they had ameliorated throughout the book-running process.
Q136 Mike Crockart: But what about your fee structure for this bid? We know it is £13 million. My maths very quickly tells me that is about 0.9%. Is it?
James Robertson: Yes, correct.
Mike Crockart: How is that broken down between base and performance?
James Robertson: The fee structure is a 0.9% base fee and a 0.3% incentive fee. That incentive fee is based on seven criteria, on which the Secretary of State will judge at some point whether or not that is payable.
Q137 Mike Crockart: What are those seven criteria that decide on your bonus?
James Robertson: They include the aftermarket and working well with the Secretary of State. I have got the seven here. I can tell you directly if that is helpful, or I can write to you with those.
Mike Crockart: It is helpful to know right now, because what we are trying to gauge is whether it affected your valuation of the company and effectively the receipts that the taxpayer got for selling it.
James Robertson: To be clear about the incentive, our incentive is to get the absolute best price at IPO-not afterwards; the best price at IPO. That is why it is a percentage of the base value of the company that is sold. The incentive fee is often driven by the fact that you have, as bookrunners, done a good job of marketing the company and worked well with the selling shareholder. The incentive fee is also based on that ultimate IPO price, as a percentage of that.
Q138 Mike Crockart: Looking through a lot of the information, the bit that worried me most was a need for a "positive share price performance". Does that factor in your bonusfee structure?
James Robertson: No. When we talk about positive share price performance, IPOs are sometimes judged on the success of them and the fact that in the aftermarket there will be some trading up. What issuers want to see post a flotation is that the stock carries on being supported by some rise in the share price and that it is seen as a success. That is often important, because a lot of issuers, including the Government in this case, have a residual shareholding that they want to maximise value for in the longer term, and having the perception of a positive aftermarket performance and the perception that the deal has been a success is helpful in maximising value for the full 100% of the stake.
Q139 Rebecca Harris: Between you, the valuation for the Royal Mail ranges from just over £3 billion to just under £10 billion. I wonder if you could perhaps explain to me how there can be such a wide range of opinion on this issue.
John Mayne: At JP Morgan-bear in mind this is back in May this year-we proposed our valuation at between £6.8 billion and £8.5 billion, and we made some assumptions there that the underlying valuation would have come from a dividend yield but also around growth. We thought there was a good growth opportunity for the Royal Mail in the context of parcels growth and the modernisation programme, and we also applied a particular view around the dividend payout ratio, which is simply the amount of money out of net income that is paid in the form of a dividend, as a percentage. You do not need to change those assumptions very much to have quite a range in valuation, but certainly from the outside looking in, with the assumptions we made, that is how we drew our conclusion that a range of £6.8 billion to £8.5 billion was a sensible one.
Ben Story: I am also happy to comment. The first point I would like to make is that, like JP Morgan, this was the preliminary valuation we submitted. It was a desktop valuation. We did not undertake any due diligence, and we did not have the benefit of any marketing or bookbuilding. It is quite difficult, in the first instance, to compare a bid that was submitted as part of an IPO adviserselection process with the final price at the time of an IPO. They really are incomparable. That is the first point I would like to make.
Nonetheless, just to explain our valuation and how it differed from the bookrunners’ valuation at the time of the IPO, we did look at dividend yield. We felt that was the appropriate primary valuation measure. The reason for that is we did not view this as a strong growth opportunity, and therefore we felt the investors would look towards the dividend yield, and also it is a measurement that is used by many of the peers that are listed. That was our primary valuation method. We took a dividend yield range of 5.4% to 5.9%, and we took an assumed dividend of £351 million. When you apply those two, you get to our range of £5.9 billion to £6.5 billion.
If you look at the bookrunners’ valuation at the time of the IPO, while, as I have said, they are not really comparable because they are very different processes, theirs was a much more detailed and informed valuation, and if you look at the dividend yield at the time of the IPO, it was 6.1% to 7.7% versus our 5.4% to 5.9%. We were slightly more aggressive, but they were not completely out of kilter. Where we were very different was on our dividend assumption of £351 million. In actual fact, the dividend that we now learn should be applied is £200 million. We were an outsider. We did not have very much information; we had to come up with some preliminary forecasts. We came up with a very different number. We also had a much higher dividend payout ratio. Our number was vastly different from the Global Co-ordinators’. That explains a large amount of the difference between the valuation we submitted and the valuation that was used at the time of the IPO.
James Agnew: Our valuation was also on a desktop basis and, again, we had not had particularly close access to the company. We valued the company on four different metrics: discounted cash flow; sum of the parts; trading multiples, where we compared with what we saw as the two main peers, being Deutsche Post and Österreichische Post; and also on dividend yield. Across those metrics, the central point in our range was £5.5 billion to £6 billion.
Gert Zonneveld: We had two valuations. We had one valuation where we were put forward for a role. Our valuation then was £4 billion to £5 billion. We then had another valuation, which was when we wrote what we call a preinitiation note when the deal was still alive, where we valued the deal between £3.7 billion and £4.5 billion. That was at a slight discount to our original range to reflect the market uncertainties at the time. Remember the US Government had shut down and there were some issues there. Regarding the way that we approach a valuation, our view is that typically the valuation should reflect three things predominantly: the growth potential of the company; the risks; and the financial returns. In addition, we look at different things, such as strength of the management, the financial track record, the cyclicality of the business and the regulatory environment. However, in a nutshell, if the company is stable with predictable cash flows, then DCF-which is where you discount future cash flows into today’s NPV-is appropriate. If not, we tend to look at typical earnings and cash flow multiples and dividend yields, particularly if there is a peer group of companies available that you can compare them with to have a reference point, so to speak.
In the case of Royal Mail, we predominantly used a peer group of six postal companies trading on various markets as a reference point and we applied a discount that Royal Mail probably should trade at relative to that peer group, because of the fact it did not have a track record and there are some uncertainties surrounding transformation cash outflows in the coming years. There are some reasons to assume a discount, and that is why we came up with our valuation of £3.7 billion to £4.5 billion.
Q140 Chair: You said you based your valuation on an assessment of a peer group. Was this peer group the continental equivalents of Royal Mail?
Gert Zonneveld: It is a group of six companies. In May there were only five; bpost, which is a Belgian company, was added to that. One of them is in the Far East. It is a group of six companies that all, to a certain extent, are exposed to the same trends in the market; they are all facing declining letter volumes, they are all seeing increasing parcel volumes, and they all have regulated business to some extent. They are not all directly comparable. For some companies, like Deutsche Post, only about 40% of their profits come from their postal operations. However, by and large, as a group, they provide a very good reference point in terms of valuation for Royal Mail.
Q141 Chair: In his evidence to the Committee, the Minister said in fact there were comparisons made with, I believe, these same companies, but they came to completely a different conclusion. Have you any idea of why that might be? I am not expecting you to secondguess the Minister’s thought process.
Gert Zonneveld: I would not. I have not seen any research of other banks. I have not seen any research at all on Royal Mail Group, except for my own, so I cannot comment on other people’s assumptions.
Q142 Rebecca Harris: It is quite fortuitous to have left Mr Robertson and Mr Cormack to the end, because I believe Goldman Sachs and UBS were the lowest bids. Could you explain why you think your valuations were the most convincing?
James Robertson: You have got to remember that the pitch process and those valuations were six months before the IPO. The real valuation is what people are prepared to pay for it on the day of IPO, not what people are going to pitch for it. There is always a wide range of valuations-we have seen that through the process-and a wide range of views on the company, partly because the risks and opportunities of the company are quite substantial. The Royal Mail did not have a track record of profitability and only really made a substantial profit in the UK in March this year, unlike some of the other postal operators, who had a long track record of 7% or 8% margins. There were other risks going around the business with respect to the VAT litigation, endtoend competition from TNT, and the fact that it has got one of the largest pension funds in the UK. People can take a different view of those risks and how benign they are. Those individuals whose valuations have been at the very high end-not necessarily in the pitch process but throughout the process-have a very benign view of that risk, and other people have taken a less benign view of that risk.
Rebecca Harris: Mr Cormack, do you want to add anything to that?
Richard Cormack: That is a good summary. Ultimately, as James has said, the valuation at IPO should be divorced from the values that people pitch. At the time that we pitch, we are all doing outside-in valuations without the benefit of due diligence, as has already been mentioned. By the time that we price an IPO, we have undertaken a very comprehensive exercise from a due diligence perspective in terms of preparing the company for the market; there is an extensive engagement with the market around the company; and, on the back of that, we build a book of demand at different prices and are able to price the transaction at a clearing price for the size of deal that we are looking for. In this instance, we were looking to sell up to 60% of the company, which is around £2 billion in value.
Q143 Rebecca Harris: Given that Royal Mail shares are currently selling at £5.50 and have been for some time, do you not accept that you undervalued the company?
Richard Cormack: There is a very different dynamic in terms of the price at which you can clear, in the case of the IPO, 600 million shares-as I say, nearly £2 billion-based on all of the information that we had at the time in terms of where the syndicate research analysts were indicating their value, including where institutions were telling us they were prepared to pay, and where the stock is trading at the moment. The average volume at the moment of these shares on a daily basis is about 1.3 million shares, versus the 600 million shares that we placed at the time of the IPO. I do not think that today’s price is indicative of where we could have placed 600 million shares.
Q144 Paul Blomfield: I just want to clarify, Mr Robertson, a point that you made in terms of assessment of risk. You said one of the factors was the pension fund.
James Robertson: Correct.
Paul Blomfield: For valuation, had the Government not taken that out of the equation?
James Robertson: They had taken the majority of the pension fund. The historic liabilities of the pension fund had been transferred to the Government, but the ongoing liabilities of the pension fund, which accrue on a yearly basis to the 115,000 members of that pension fund, remain with the company. In terms of numbers of members and the rate at which that liability is accruing, which at the moment is about £700 million a year, it is one of the largest, if not the largest, in the UK.
Q145 Katy Clark: I just have a follow-up question to Mr Zonneveld. You say that the number of shares that were floated would affect the price that you thought was appropriate. Do you therefore think the Government, as custodian for the taxpayer, should have considered floating a smaller number of shares? How would that have affected your advice?
Gert Zonneveld: I am not sure I suggested necessarily that the valuation was linked to the proportion of the company being privatised. That would not have had an impact on my valuation.
Q146 Chair: Could I just ask both UBS and Goldman: what was your desktop valuation at the first stage of the bidding process?
Richard Cormack: At the pitch process, we put in a valuation range of £3 billion to £3.75 billion, with an expected base case outcome of £3.25 billion to £3.5 billion and an upside case of £3.75 billion.
Chair: So the final flotation price was about mid-range.
Richard Cormack: It was about mid-range. I would say that the assumptions that we made underlying that value ended up being slightly more optimistic than the assumptions that were used by the syndicate, and the multiple, therefore, that we achieved in the IPO was slightly higher than the multiple that we pitched at the time of that process.
James Robertson: We had a base value of £3.1 billion with a range, towards the top, of £4.6 billion.
Chair: So the final flotation price was at the lower end of your range of estimates.
James Robertson: Yes, it was.
Q147 Nadhim Zahawi: I just have a point of clarification. Presumably for UBS, because you had been working with the company so closely, desktop would not apply. You had more information about the business.
James Robertson: We had had a number of years working with the Shareholder Executive and the company, understanding the business and understanding its forecasts.
Nadhim Zahawi: Versus your colleagues here on the panel.
James Robertson: Versus my colleagues here.
Q148 Mr Walker: Mr Zonneveld, early in the process you published research suggesting that you felt that there was the potential for the pricing to be undervalued and the Secretary of State described you as an "outlier" at that moment. Do you feel that you have been vindicated by the subsequent share price performance? What other factors were judged in that? Do you accept that you were an outlier in terms of the overall group of analysts?
Gert Zonneveld: As an analyst, I analyse companies; I value companies. I do what I think is right for my company and how we service our clients. I did not set out to make newspaper headlines; my valuation came out where it came out. If that makes me an outlier according to Mr Cable, then so be it. I have no issues with that.
Q149 Mr Walker: But you must keep an eye on your peer group and where other analysts are sitting.
Gert Zonneveld: It is early days. I was the first analyst to initiate on this stock post my preinitiation note. Today, three banks have initiated on the stock. I did stick my neck out, so to speak, at the time, and I went public with my valuation, but I felt compelled to do so and I felt convinced that it represented a very attractive opportunity for our investors to take part in this IPO. Yes, I am pleased to see that the share price has performed well.
Q150 Mr Walker: Another thing that you were quoted on in the press was about the balance of supply and demand and the fact that, because it was of a scale that would potentially take it into the FTSE 100, there were a lot of people queuing up to buy shares to fit in with their overall investment structure. Is that something that you feel has been one of the drivers of the price since listing?
Gert Zonneveld: I think it has. Even now, we are very close to the cusp of being in the top 90 largest companies by market capitalisation, and freeflow percentage of that, in the UK, so, yes, I do think that has been a factor. Maybe it was not at first, but certainly it has become a more relevant factor as time has gone on.
Q151 Mr Walker: Is that a factor that, as Global Co-ordinators, you could take into account as part of your pricing process-those structural aspects of a company being close to the FTSE 100 and the potential for hedge funds to buy in after the flotation and drive the price up?
James Robertson: It is a balance, is it not? You are trying to place the stock with longterm investors who are going to be supportive of the company in the long term and are not going to be sellers. If you want then to allow some space for people to sell to provide the liquidity so that index funds can come in and not drive the price up, there is a bit of a tension between those two things. It was an objective of the Shareholder Executive to make sure that we placed the stock in the hands of longterm bluechip investors who understood the company well and would be supportive of future selldowns to maximise value there, not necessarily just to provide stock to people who might sell it to provide liquidity afterwards.
Q152 Mr Walker: In terms of securing those longterm investors, are you happy with the way that the bookbuild worked and the way subsequent trading has taken place?
James Robertson: The investors we placed the stock with are exactly the sorts of longterm bluechip investors the company should be very pleased to have on their shareholder register.
Q153 Mr Walker: There are some new entrants who have come on board since the bookbuilding. Notably, TCI have probably played a role in driving up the share price by buying an awful lot of shares in the subsequent weeks. How much of an impact would you say that has had on the pricing?
James Robertson: It has had an impact. Inevitably, when people buy 5% or 6% of a company-supply and demand was quoted before-that does have an impact on the company. TCI is also a company that other investors often follow into stocks, and that has supported the price at its current level.
Q154 Mr Walker: Is there a reason why they were not part of the initial bookbuild process and they were not marketed to as potential investors in the first place?
James Robertson: They were marketed to. They were seen by the management and had meetings, and they put an order in the book as well.
Mr Walker: So they had some shares from the off, did they?
Nadhim Zahawi: Yes.
Q155 Mr Binley: I want to pursue Mr Zonneveld’s comment that he did not want to be in the public arena, as it were, with regard to his comments and that he was not concerned about what the Secretary of State said. I must tell you that I found your throwaway line about not being concerned to be evidence that, in fact, you were quite deeply concerned, not least with the Secretary of State’s comment after he said, "This is one and it is an outlier"; "I do not want to rubbish them." In political speak, that means he does want to rubbish you, quite frankly. Did you feel that was the case? Did you feel that he was playing politics in a way that perhaps you did not care for?
Gert Zonneveld: He is a politician, so I guess playing politics is what he does.
Mr Binley: That is why I am asking the question.
Gert Zonneveld: He is entitled to his views. I did not have any major issues with it. I said we did not aim to make headlines. To get publicity on the back of it is not necessarily a bad thing, because I think it is important and it increased the awareness of this IPO. What I said was we valued the company because we were convinced that that was the right thing to do. That was our independent assessment; we did not do it with a view to gaining exposure.
In terms of Mr Cable’s comments on my firm, those are his comments; I do not have anything more to add to that.
Q156 Mr Binley: Do you think they were made because he wanted a specific political outcome, which you clearly disagree with?
Gert Zonneveld: At the time, I was the only analyst in the market with a view, apart from the syndicate banks. Yes, my valuation was significantly higher than the official price range, because that was the only thing I could go on.
Q157 Mr Walker: More broadly, it is generally accepted that IPOs, in order to address some of the issues we have heard about, do tend to go at a bit of a discount, and it tends to be seen as a positive thing if the shares go up a bit. All these banks have worked on a number of IPOs. What sort of range of discount would you generally expect there to be in an IPO of this scale?
Ben Story: We would assume an IPO discount of 10% or 15% would be reasonable. If you look at the precedents, they would stand by that. That is in terms of the first day’s trading.
Mr Walker: In this case, the first day’s trading was 38%.
Ben Story: 38%.
John Mayne: I would agree.
James Robertson: There is an interesting point to make in terms of IPOs this year in the UK. There were eight before the Royal Mail. Four of them are trading above 60% more than their IPO price; two of them more than 25%; and two of them are down 20%. The IPO discount we talk about is right, but IPOs, certainly this year-and I think that is characteristic of all IPOs-can be quite volatile like that.
Q158 Mr Walker: Is that because it is a tight market for IPOs-there are not nearly as many, so therefore the price movements tend to be much more exaggerated?
James Robertson: Every IPO is slightly different. With some companies-this is one of those-different investors can take very different views of the value of the company, because, as I said before, there are different risks, and you can take different views on those risks and different views on the opportunities, and the range of expectations for the company can be very wide. In this case, the majority of the bluechip investors thought that the company was worth around £3.30. There are other people who have taken a different view in terms of those risks and opportunities.
Mr Walker: Those bluechip investors I suppose do have quite an incentive to make sure it is an attractive price for them, when they are buying a holding for the long term.
James Robertson: It is a competitive process through the bookbuilding auction, as it were.
Mr Walker: Any comments from Goldman Sachs?
Richard Cormack: I would agree with the comments that have been made, both in terms of what a typical IPO discount might be expected to be and in terms of the dynamics of the market this year. In fact, 20% of the IPOs that have been executed globally this year have gone up by more than 30% on the first day of trading. It is a market, to your point, that has been quite tight in terms of demand and supply. When you get the explicit situation that we have faced-and has also been discussed in this Committee-of one, or a small group of, investors bidding up the stock quite aggressively in the initial trading period, that will only further extend that initial premium.
Chair: Have you any further questions, Robin?
Mr Walker: I want to hear from Deutsche Bank, as the other representative of the brokers at the table.
James Agnew: I would not diverge greatly from that. The IPO discount we quoted in our pitch document was 5% to 10%. The only other thing I would add is that, where a company has a significant retail base, it can often impact the volatility. We floated the Halifax at a price of 732p. Within a year, the price had gone to £10; two years after that it was back to £4, and then it subsequently recovered. That highlights how it can take quite a long time for the stock to find a level.
Q159 Nadhim Zahawi: Just picking up on Mr Agnew’s point, it is an occupational hazard in your industry as to where the price is at. Look at what happened with Twitter. They went for the top range and revised the IPO price, where most of the experts said that was probably too high, and then on IPO it went to $50 from $26 or $27. Just picking up on Mr Agnew’s point, yes, one can look at shortterm pricing, but in reality you do not get a good indicator for a stock until you get to the medium and longer term, over a twoyear period. I really wanted confirmation of that from you.
The other point that is worth explaining to the Committee is that the institutional investors who buy in at the bookbuild will also place further orders to take out the overhang, and when you have got a stock that is so high profile in the media and where you have got a large retail following as well, you can get these sorts of spikes happening. I really just wanted the panel’s view on that.
Richard Cormack: Both of those points are fair points. It does take time for a stock to settle, in particular in a transaction where you have a heavy retail component and where the capitalmarket dynamics were very strong for the deal. It can take time for a stock to settle and, indeed, to season into the market. It will season over time as the news flow evolves from the company. It is certainly true that you cannot immediately translate a heavier degree of oversubscription into a very sharp increase in the stock price. There are plenty of instances where heavily oversubscribed IPOs have traded down in the aftermarket. That is a point well made.
Q160 Nadhim Zahawi: But in terms of the business itself and its future and wanting to raise more money, it is better to have a successful IPO than one that disappoints the investors.
Richard Cormack: Absolutely. One of the key objectives of the transaction was to provide access to private capital for the company, and that includes access to the equity capital markets-and for that to be the case, there needs to be a positive dynamic in the capital markets for the share price-and also access to the Government for the 30% residual stake. They hold 50% of the amount that they sold in the IPO, so they remain very vested in the aftermarket performance, and the overall value for money that is achieved from a privatisation includes what is achieved in the residual stake.
Q161 Mike Crockart: Mr Robertson, I just want to take issue with your description of the bookbuilding process as being an auction. It seems a rather strange description of it, because it does not feel like any sort of auction that I have ever been to, except perhaps a silent auction, where you are trying to get things for as little as you possibly can and trying not to be honest about what you are ultimately prepared to pay for them. It is described as a "pilot fishing process". That seems to describe it far better than "auction".
James Robertson: The pilot fishing process was slightly earlier in the process, when we were initially trying to get investor views. The bookbuilding process, which happened between 27 September and 8 October, is there to encourage people to increase their price and also the size of their proposal during that period. We ask for bids and they come in and give a price and, during that period, we walk people up in terms of price. As an example, in this case, on the second Friday we narrowed the range to 300p to 330p and we asked people, if they were prepared to, to revise their range up. On the Monday after that, we guided people towards the top of the range and said, "This is what you need to pay if you want to continue to participate." In that way, there are people competing for stock on a price basis through that bookbuilding period.
Mike Crockart: We will come back to that about the range in a little bit.
Q162 Mr Walker: One point has arisen a couple of times now about the proportion of the company that was sold and the fact that the Government has held on to a residual 30% stake. I just wanted to understand whether you feel that the 60% that went into the market was the right structure to achieve the best value in that sense. Would it potentially have achieved a better value with a bigger freefloat, or did you, as Katy suggested earlier, have the potential to advise that it could have been smaller?
James Robertson: The first thing, to be clear, is that the feedback we got from investors throughout the process was that the Government had to sell a majority for it to be a successful IPO, and the value would have been severely impacted if we had sold anything less than a majority. There was then the balance of, beyond that, how much to sell. The Government realised that this company did not have a track record and there were some risks hanging over it with respect to industrial relations and VAT, as I have discussed before, and therefore retaining a large residual stake was important for value for money for the taxpayer, because it could be sold later at a better price when some of those risks had perhaps become clear. It was a balance of getting the best value for the initial sake and retaining value for the future.
Mr Walker: However, that was something on which you had flexibility to advise; it was not set in stone that this was the approach that had to be taken.
James Robertson: No, there was a discussion through the process.
Richard Cormack: To be clear, the Government went out with a range of sizes at the time that we started the bookbuild. They offered, as a base deal size, roughly 40% to 52% of the company. With the addition of what is called the greenshoe option, that went up to 60%.
Q163 Chair: In his letter that was published and sent to me, the Secretary of State indicated that "a number of the key longonly accounts expressed concern over the possibility that the top of the range might be revised above 330p; a number of other longonly accounts also indicated order sizes reducing as the price rose up to 330p". If I could ask Goldman Sachs and UBS: do you know which long-term accounts advised this, and do you know if they subsequently bought shares well above the 330p level?
Richard Cormack: In the context of the book-build, as James has mentioned, we started with a price range of £2.60 to £3.30. A lot of the initial demand came in at the lower end of that range and a lot of the initial indications that we had, particularly from some of the accounts who the management had spent the most time with prior to the launch, were indicating very much towards the bottom of the price range. As we got momentum into the bookbuild process and we got increasing demand, we started to move the price guidance from the broad £2.60 to £3.30 range to, initially, £3 to £3.30 and then, ultimately, the deal was priced at the top.
In the course of those discussions with the market, some institutions cancelled their orders, some institutions staged their orders between £3 and £3.30, and some, indeed, volunteered the view that, were the price to be increased, they would either not participate or they would, again, reduce the size of their orders. I cannot reveal the commercially confidential conversations we had with specific institutions, but I can confirm the comments that the Secretary of State made in his letter.
Chair: You have not answered the point of my question. Do you know if any of those institutions have subsequently bought shares at a higher price?
Richard Cormack: I do not have full visibility on who has been buying shares, because that happens away from my department on a different side of a Chinese wall.
Chair: Effectively, the taxpayer has no way of knowing whether those institutions that said they would only buy at a certain level have subsequently been prepared to buy at a much higher level. Is that the case?
Richard Cormack: It is the case that we do not have full visibility. The company’s share register will become public over time, and at that point it will be clearer in terms of who has been buying and who has been selling postIPO.
Chair: I am sure this will be analysed in great depth. UBS, have you any comment on this?
James Robertson: I think that is absolutely right.
Q164 Katy Clark: How were the buyers picked? How did that happen? Who did it? Who made those decisions?
Richard Cormack: We had a very broad engagement with the market. That engagement started at the end of last year and played through to the marketing of the transaction, which completed in October of this year. I would break it into a couple of phases. In the period until June this year, we met with 65 institutions, predominantly UK institutions, but also institutions in the US, in Canada and on the continent. Those institutions were selected by us as well as the other book-runners in the process who participated in the marketing of the transaction, and in all instances were discussed and agreed with the Government’s independent adviser. We had about 120 meetings with those 65 institutions through June. We then had a more targeted phase of meetings prior to the launch of the transaction with about 24 accounts. That is the pilot fishing phase that was discussed earlier. Those institutions, again discussed and agreed with the Government’s adviser, were selected based on the feedback that they had given earlier on in the process-all of them came from the initial 65-in terms of their willingness to invest and also their tolerance for some of the risks that James has outlined that the company was facing. Those institutions gave us indications of demand that helped give us the confidence to launch.
As soon as we had that confidence and we launched, we then engaged very broadly with the market. The syndicate research analysts met with over 500 institutions in the phase that is called predeal investor education, which is when the syndicate analysts go and meet with institutions ahead of the management meetings. The management met with over 200 institutions during the roadshow. There were around 800 individual orders in the book of demand. Ultimately, nearly 300 of those got allocated stock. The allocation process was determined by the Global Co-ordinators and bookrunners, with, again, the independent adviser signing off on the allocation process.
Q165 Mr Binley: The Secretary of State cited to you, I believe, the dangers of the industrial dispute between the CWU and the Royal Mail, suggesting that that could exert a downward pressure on the offer price. Did you factor that advice from the Secretary of State into your valuation?
James Robertson: Yes. It was factored into it in a number of ways. The initial price range was set after these pilot fishing discussions, which happened at the beginning of September. On 2 September the CWU had announced that it was going to have a ballot for a strike, and the strike, if the ballot had been successful, would have happened during our bookbuilding period in midOctober. Those indications of appetite have been coloured by that proposal. Through the process, there were further updates with respect to the ballot.
Q166 Mr Binley: How much did you alter your valuation by as a result of that advice?
James Robertson: I do not think it is our valuation; a lot of this is what investors are willing to pay.
Mr Binley: Your view of the share price, then. I do not care what you call it.
James Robertson: The investor view of what they were willing to pay was coloured by that, and that helped set the range of £2.60 to £3.30.
Mr Binley: By how much?
James Robertson: It is difficult to give an exact number regarding how much that affected it.
Richard Cormack: If I could just come in as well, it would probably be unfair to characterise it as the Secretary of State advising us that there would be downward pressure. Ultimately, the feedback we had from the market was that the industrial relations were a concern, and the pricediscovery process that we went through in the marketing of the deal, from pilot fishing through to execution, was against that backdrop.
Q167 Mr Binley: Are you arguing, then, that you advised the Secretary of State and that his remarks were based on your advice? Is that what you are saying?
Richard Cormack: I am saying that the feedback that we had was that the industrial relations certainly impacted the price that people were prepared to pay.
Q168 Mr Binley: I want to understand the process by which the Secretary of State came to make that comment. Are you arguing on the basis of your response just then that you passed your feedback from the market on to the Secretary of State and he therefore made that remark on that basis? It is a simple "yes" or "no" question.
Richard Cormack: We passed our feedback on to the Secretary of State.
Mr Binley: And you believe that he made his remarks on the basis of your advice.
Richard Cormack: I am sure that is right.
Mr Binley: Okay. That concerns me.
Q169 Chair: The Secretary of State, in his public letter, put quite a lot of weight on that particular issue. I was rather surprised that in all the considerations to date you hardly mentioned that until Brian asked you that question. Why, if it was such an important factor, did you not make more of it earlier in your assessment of the valuation process?
Mr Binley: You look startled.
James Robertson: It is a good question. Up until September, we were hoping to get a pay deal and to have been able to do the IPO with a backdrop of a positive industrialrelations scenario. It became very clear at the beginning of August to the middle of August-and we were briefed on this by the company extensively, who were having the dialogue with the CWU-that a pay deal was very unlikely and it was likely that there would be industrial action of some sort during the IPO process. From September onwards, it was the major risk factor in respect of the price and the achievability of the deal.
Chair: I come back to the point I made. We have had something like 45 minutes of discussion on this. If this was a major factor, I find it absolutely amazing that you have not mentioned it before.
James Robertson: I think I mentioned it once.
Chair: You did mention it five minutes ago in passing, yes.
James Robertson: It is a fair question, but it is absolutely right what I have just said about it being the most significant factor in terms of the pricing of the deal postSeptember, rather than before September during the pitch process.
Q170 Mr Binley: How much did the possibility of a US default impact upon your minds, and where did that advice come from? Did it come from the market or did it come from the Secretary of State?
Richard Cormack: The US default impacted the market environment against which we executed the transaction. Indeed, the UK market was down 12 days in a row in the leadup to pricing. That certainly was a factor in the transaction. It was less of a factor in the bookbuilding itself in terms of the momentum that we were able to generate in the transaction, but it was a factor in the deliberations around whether or not the price range should be increased.
Q171 Mr Binley: Later on, there was an indication that you looked at the matter of revising the price range upwards in the bookbuild. However, this was not pursued, on the basis that your assessment was that the market would taper off. Is that so?
Richard Cormack: Our assessment, based on the feedback that we had, was that there was limited demand at significantly higher prices from long-term institutional investors. We believed that a moderate increase in range might be achievable, but it would only be a moderate increase in range, based on the feedback that we have already discussed from the investor base. In addition, as we weighed the factors of increasing the range, we also had to include the factor that, by changing the price of the transaction and therefore the terms of the transaction, we would have to extend the period in which the deal was open for an additional 48 hours to offer investors a right to withdraw their applications. I would say at that point, as we have just discussed, the threat of industrial action and the fact that the strike ballot was due just after the closing of the original timetable was a factor, and the US debt ceiling negotiations and the fact that there had not yet been resolution was absolutely a factor.
Q172 Mr Binley: You are a wise man; you knew it would come to an end. You knew they would settle in the end, did you not?
Richard Cormack: Until they settled, there was always a risk that they would not settle, and if the point at which they did not settle and therefore the market hiatus came whilst we were still trying to close the transaction, that would have put the transaction at risk.
Q173 Mr Binley: This is particularly to UBS and Goldman Sachs, because the Secretary of State wrote to us to say, "some potential investors ... stated that they were not willing to invest at all and many others who focussed on the business and financial implications of strike action" were making the same sorts of comments, which you have just confirmed. Was that your advice to the Secretary of State?
Richard Cormack: That some investors were not prepared to invest?
Mr Binley: Yes.
Richard Cormack: Absolutely.
Q174 Mr Binley: Okay. My concern is that I initially thought that this might have been a political plan to keep the price down and ensure an effective and successful sale. The more I am getting your answers, the more I am beginning to suspect your intelligence-gathering organisation. Am I right to do that? All of the advice you gave turned out not to be helpful from the taxpayer’s perspective, did it not?
Richard Cormack: All of the advice that we gave was informed by a very comprehensive market-engagement exercise. As we said, we talked to hundreds of institutions; we gathered feedback from those institutions; we built a book of demand against the price range that we set; we had discussions with investors as we moved the price guidance towards the top of the price range; and we gave all of our advice to the Government on the back of that.
Mr Binley: So you did all this intelligencegathering work and you came out with the wrong answer and you advised the Government with the wrong answer.
Richard Cormack: It goes back to the comment that I made earlier: at the point of the IPO, we were looking to place 600 million shares, and we had to find a clearing price for 600 million shares from the institutional investor base, and to an investor base that would provide some stability in the aftermarket. The current trading price is not reflective of where we could have placed that number of shares. As I said earlier, the current trading volumes of the stock are around £7.5 million a day. We placed nearly £2 billion. It is a very different dynamic in terms of that price tension.
Q175 Mr Binley: I want to be absolutely clear. With all of your very sizeable and expensive intelligence-gathering mechanisms, you came to the conclusion that the investors would not pay more than 330p. That was the conclusion you came to. That was the advice you gave to the Secretary of State, and all of his comments were based on that assumption. Right from the beginning, on the basis of your advice, the Secretary of State was adamant that it would not go above 330p. Somebody somewhere has misled the taxpayer and cost the taxpayer in the initial instance. Why do you have the confidence in your intelligencegathering mechanism to suggest to the Secretary of State that you were right when you were wrong? Or did the Secretary of State decide for political reasons that he wanted to keep the price at that level in order that he had a successful sale?
Richard Cormack: We ran a market-based book-building process.
Mr Binley: I have heard that. You have explained that to us. But you were wrong.
Richard Cormack: Our job and our objective was to find a market clearing price for the size of transaction that we were executing, and that is what we did. There were a number of objectives in this transaction. One was to introduce the company to the capital markets, to provide access to private capital, to provide a platform for future transactions. There was clearly a very important objective of achieving value for money for the taxpayer, for the company and for the privatisation as a whole. Based on all of the information that we had at the time, based on all the analysis that we did at the time, the £3.30 price that we priced the transaction at was the clearing price we could achieve for the amount of shares that we were selling.
Mr Binley: I just wonder whether the taxpayer has the right to think that, for all the money you are paid, you were not very clever at your job.
Chair: I have got a couple more to come in, but first if you would just respond to that last point that Brian made.
Richard Cormack: As we look at the transaction, this was the largest IPO in Europe for two and a half years, the largest IPO in the UK since 2006 and the first major privatisation since 1996. This was a large, complicated deal against an uncertain backdrop in the markets with the debt ceiling, and from a company level with the ongoing strike ballot. In that context, this was a well-executed transaction.
Q176 Chair: From a lay person’s point of view, it would appear that either you were misled by the companies that you consulted or, having consulted them, you misled the Government.
James Robertson: We consulted, as we have said, a large range of institutions. It was very clear to us on 8 October that the target investor base of bluechip investors would not pay much more than £3.30. We discussed the fact that we could have put it up another 20p or so, and that was our estimate of how far we could have pushed it. At that point, there was the assessment, as we have discussed, of the risks of extending the price range, which, I should add, had only been done once in the UK since the year 2000.
Q177 Chair: UBS had a higher top figure than Goldman Sachs, did it not?
James Robertson: That was our pitch range in June. At this stage, it is not necessarily what we think the right value is; once we have checked that the base value is fair, it is what the institutions are willing to pay, and we are trying to maximise that value. That is what we were listening to. That is why I am saying the current price, when they are trading £7 million a day, is not reflective of what we could have sold 600 million shares for. 330p was the price at which we could have sold 600 million shares to the target bluechipinstitution investor base that we wanted to sell them to.
Q178 Chair: Would you agree that if those institutions subsequently bought those shares at a higher price, you were misled?
James Robertson: If people have subsequently bought shares at a higher price, firstly, they could have said something that was not entirely their view, and secondly, some shareholders would have been allocated a small amount of stock and they would have said, "It is either not worth me holding a small amount of stock or I have got to bring it up to a larger level," and may have bought in that case. There are many reasons why they might buy and there are reasons that some of them would have sold as well.
Chair: I think my case is made.
Q179 Katy Clark: I am going back to the industrial relations issue. I should declare my entry in the Register of Members’ Interests. I am a member of the Communication Workers Union and Chair of their Parliamentary group.
If the Government had delayed flotation until 2014 to allow resolution of the industrial dispute-and you will be aware that that industrial dispute is now resolved-do you think that would have meant that there could have been a greater value received from investors?
James Robertson: We considered that very carefully because, as I said, it was the biggest significant risk, and by the end of August it was clear that it was not going to be resolved. This is something the company had been working on-to try to get a pay deal-for almost a year, and there was no evidence from the feedback we were getting from the company that that was going to get resolved before an IPO would have taken place, because some of the discussions, or disputes, were around the fact of the privatisation. Ideally, we would have done an IPO when the pay and pensions discussions had concluded favourably, but the feedback that we got was that it was unlikely that was going to happen, even if we delayed until the following spring.
Q180 Nadhim Zahawi: I just want to go back to the point that Brian Binley was trying to push you on. Let us go the other way. I am going to put the question to all of the panel. If you had to place 600 million shares today, what discount to the share price of £5.40 would you have to offer to put it away today?
James Agnew: I do not think I am best placed to answer that, to be honest.
Nadhim Zahawi: You are an expert, Mr Agnew. Give me a figure for the discount. What discount do you think you would have to offer?
Chair: I have to say: if you cannot answer it, who can?
James Agnew: To be clear, our involvement with the Royal Mail process ceased back in May.
Nadhim Zahawi: It does not matter. What do you think? It is trading 1.6 million shares a day; you have got to place 600 million. Do you offer a discount or not? Let us start with that.
James Agnew: I am sure you would have to offer a discount to place them.
Nadhim Zahawi: A significant one?
James Agnew: As I say, you would need to know much more about the supply and demand and the appetite of investors for this stock. If you were placing another 600 million shares today on top of the 600 million you have already placed, you have absorbed a fair amount of the demand that is already in the market, so you would not necessarily expect that demand to be immediately available at today’s market price.
Nadhim Zahawi: Gert?
Gert Zonneveld: It is not that I do not want to answer the question, but the fact that-
Nadhim Zahawi: That means you do want to answer the question, if I apply Binley’s law.
Gert Zonneveld: The reason is it is a very strange question. There has been a significant fundraising that has taken place and you are saying, "What if you would have to raise a similar amount of money today or tomorrow?" That is a difficult one. In my view, it would require a significant discount.
Q181 Nadhim Zahawi: The Government has a residual shareholding, so I am just asking to find out what discount you would have to offer, because there are so many numbers being bandied around in your analysis and in the press that people rightly are thinking-as my colleagues here are-"Have we completely got this wrong? Are Goldman and UBS completely useless?" I just want to hear what you think. Would there be a significant discount?
Gert Zonneveld: There probably is quite a good relationship between the perception of risk and the rate of discount, so the more risks are associated with the company, the more uncertain the future; the more cyclical the industry, I guess, the higher the discount rate will be. I, as an analyst, would never be involved in negotiating or discussing any sort of discount rates for large placings, but that is my observation: that you would probably need to apply a reasonable discount rate, given the fact that there are some risk factors attached to the company in terms of potential regulation, in terms of the decline in the market and in terms of the transformation programme that is taking place.
Nadhim Zahawi: Mr Story?
Ben Story: Deals of this size and bigger have gone for smaller discounts; that is clear. However, the point made earlier is that there can be many different rates in the market, and so I do not think it is necessarily the right way to look at it, in the sense that much bigger deals have gone for smaller discounts. Some deals have traded at a loss-go back to something like BP. I do not think it is necessarily the right way to look at it.
What I would say is it is quite hard for me to know what that discount would be as an outsider. I was not part of the process; I did not do any pre-marketing and I did not know the book of demand, so it is hard for me to comment in terms of the demand and supply dynamic.
It is also fair to recognise this was a very challenging deal. We have heard about some of the market dynamics at the time of the IPO, but Royal Mail is also a very complex organisation, there are very few direct peers, and it is a company that has changed dramatically over the last few years-it has gone through a period of a lot of change. If you look at the whole IPO process, even going back to May, the economic backdrop has changed from one of perhaps a tripledip recession to one where we are looking towards growth. The market sentiment has changed at the same time. There was a lot of noise at the time of the IPO. If you look, for example, at bpost, which IPO’d in the summer, at the time of the offering that was at a discount. It was a very challenging assignment that the book-runners had with a very difficult market backdrop, and I do not think you are quite looking at it in the right way, because it certainly is the case that bigger deals have gone for smaller discounts.
Nadhim Zahawi: Mr Mayne?
John Mayne: I do not want to repeat what has been said already, to be honest. It is a very difficult question to answer. The theoretical level of a discount for repeating the process is hard to judge when so much demand has been taken up already. It is a complex question you pose. A discount would apply; how you define what it would be is almost impossible to say at this stage.
Nadhim Zahawi: But you would have to have a discount of some sort.
John Mayne: Potentially, yes.
Q182 Mr Binley: I am an average taxpayer. I have never been involved in your marketplace. I sold at a different level, but I am hearing an awful lot of sales speak. I am hearing an awful lot of stuff from you to tell us how wonderful you are, what superb back-up you have and what great expertise you have-all of you-and you have all come together like you are a professional body to defend each other. Can I, as a taxpayer, assume that all of this is the cult of the high priest, meant to be exclusive, meant to keep other people out, meant to say that you are much better at your job than you are, and you failed the taxpayer? Would that be a fair perspective, in your mind, from my point of view?
Richard Cormack: This transaction was very broadly marketed. There was a key objective of the Government to make the shares accessible to the whole UK population.
Q183 Mr Binley: That was not the question I asked. Simply answer my question. Would my point of view as an average taxpayer be fair, without all the sales talk and all the mechanisms that you want to bring to bear on it? Would it be fair in this respect? Do you feel disappointed that you have let the taxpayer down?
Richard Cormack: I feel that we executed the transaction well and in the interests of the taxpayer.
Mr Binley: I would not buy you again, but never mind; we will move on.
Q184 Nadhim Zahawi: This is a question across the board. How many of you, in your initial or eventual valuations, took into account the assumption that Royal Mail would become a FTSE 100 company? For the benefit of the Committee, can you just describe how being a FTSE 100 company would affect the bookbuild process?
James Robertson: There is kudos about being a FTSE 100 company and being a large company. In fact, the additional incremental demand that comes from FTSE 100 trackers is surprisingly low. When we are talking about indextracking demand, it is usually covering the whole of the UK index, so the incremental amount when you go into the FTSE 100 is not more than a few per cent. It does not make that much of a difference, apart from the kudos of being in the FTSE 100.
Richard Cormack: That is right. The bulk of index money tracks what is called the AllShare index as opposed to the FTSE 100. If you are in the FTSE 100, it just means that you are one of the 100 largest stocks in that index.
Gert Zonneveld: I did not take it into account in terms of my valuation of the company. The valuation of the company is regardless of whatever index the company is in. The fact that a company may enter or exit the FTSE 100 has an impact on sentiment. It is more of a psychological thing than anything else.
James Agnew: Yes, we did. With the level of our valuation, the company would have been a FTSE company-the cutoff currently is around £4 billion. We assumed that there would be incremental demand of around £65 million in the bookbuild, which, as was commented earlier, would not be hugely material in that context.
John Mayne: No, it was sentiment-exactly. We did not take it into account. At the time, our valuation would have been FTSE 100. However, it is much more around sentiment than material change in demand.
Ben Story: The same answer.
Q185 Chair: You just said £4 billion would be the threshold for entry into the FTSE 100. A whole lot of investing institutions, because they are required to index that, would have invested at that point. Was that factored into the advice given to the Government by you?
Richard Cormack: To go back to our earlier comments, the company was always going to be in the FTSE indices. The question was where it ranked in the FTSE indices: the top 100 or the second 250.
Q186 Chair: If I can just interrupt at that point, if that is the case and that was your assessment, some of those companies that said they would not invest would have had to anyway.
Richard Cormack: The way the index tracking works is there is a group of institutions who benchmark themselves against the index. They are not obliged to invest, but they will typically choose to invest in a weighting that is broadly in line with the index weighting. A number of those institutions did participate in the transaction in anticipation of index entry and will continue to adjust their positions relative to what the weighting will ultimately be. The FTSE review has not yet been announced. There is another group of institutions who track the index, who will be obliged to own an index-neutral position, but they will not be in a position to buy that position until the stock enters the index, which is expected to be just before Christmas.
Q187 Chair: Was that factored into the advice given to the Government?
Richard Cormack: Yes.
Chair: It was. But the Government still took your advice at the £3.30 level.
James Robertson: There is not a big jump between being in the FTSE AllShare and being in the FTSE 100 in terms of demand, so we factored the index demand into our advice.
Q188 Paul Blomfield: When we saw the steep rise in price, the Secretary of State described this as "froth". Is that sort of froth a normal result of an IPO?
James Robertson: I will answer that in two ways. Going back to my example of the eight IPOs that have been done in the UK this year, four of them are trading well above 50% and two of them well above 25%. It is not unusual to see those sorts of price rises.
The second point to make is one I made earlier, in terms of there being quite a range of views on valuation because it is a difficult company to value and people have very different views on the value. The bulk of views were around £3.30, and that was the clearing price for the 600 million shares. But there are people at this price level-predominantly hedge funds, particularly out of the US-who take a very different, benign view on the risks on the company and the opportunities for revenue growth or acceleration of restructuring.
Q189 Paul Blomfield: I understand what you are saying, but I would welcome each of your views on the Secretary of State’s comments. Would you share the view that that steep rise was froth-to be dismissed?
John Mayne: It was volatile. There was a huge profile around this transaction and an awful lot of interest, so you could conclude that there was a risk that there would be a lot more volatility around this particular deal than perhaps other ones.
Ben Story: As we alluded to earlier, we will see in the fullness of time whether this was froth or whether it is the fundamental value. It is difficult to say at this stage.
Richard Cormack: The points have been made. The bookbuilding dynamics were such that it was not unexpected that the stock would trade up sharply. Indeed, the Secretary of State refers to that in his letter. The sustainability of that level, as Ben said, we will see over time.
Gert Zonneveld: I do not think it is froth. These shares have been trading on the market for nearly six weeks and several hundred million shares have traded hands. Today’s value of the company is the value that the market attributes to it, and the markets generally are fairly efficient. This is not froth.
James Agnew: I agree, but, as I said earlier, you can see significant volatility, particularly with a stock where there is a large retail component. The comments have been made about the low level of trading volumes at the moment. It is just much too early to say where the stock will eventually settle.
Q190 Paul Blomfield: I recognise there were different responses to that question, but most of you, if not using the word "froth", talked about volatility. What does each of you think is the correct longterm price for Royal Mail shares? This is your business.
John Mayne: It is a very difficult question.
Paul Blomfield: Yes, but I am asking you because you are the sorts of people who get paid millions of pounds to answer these sorts of questions.
John Mayne: The price today reflects the market.
Paul Blomfield: But what would you expect the price to be in 12 months’ time?
John Mayne: I do not know the answer to that question. What I would say is that is the right type of timeframe to get fair value over the long term in the marketplace. It does take longer than we have had to date for the price to settle down. There will be more information in the marketplace about results for the Royal Mail and some more prompts coming into the marketplace from other potential flotations as well. It is a longer term question. The trouble is that for the last six months we have not been privy to any of the details, having made our presentation back in May, so we have not got the insight as an institution as to how to value Royal Mail with the detail that perhaps others might have.
Ben Story: I have not looked at the valuation since we made our submission in May, so I am not qualified to have a view on what the correct valuation should be now or in the future. What I would say is we have now come to the end of a blackout period. You will start to see independent research being produced on the company. That will certainly give you a view of what people independently think of the valuation. I am sure in due course Citi will undertake research and produce it, and then you will see Citi’s view on the valuation. My team have not done any work since the submission in May, so I am not qualified to answer your question.
James Robertson: They have expressed it very well. There is going to be a lot happening in the next 12 months with respect to the industrial relations, with respect to VAT and with respect to whether TNT rolls out further in Manchester and Birmingham, which is all going to affect the share price. It is a very difficult judgment to make about where it is going to be in 12 months’ time, but there will be a lot of independent voices over the coming months that will give you a view.
Richard Cormack: Same answer.
Gert Zonneveld: I do have a value. I initiated officially on the stock on 25 October with a target price of £5.70. We are trading around £5.50 at the moment. This is where I see the fair value of the company. That is a 12month horizon.
James Agnew: I do not feel particularly close to this stock-again, I have not spent a lot of time looking at it since May-but one thing I would focus on is one of the metrics. We certainly assumed in our valuation that this share would trade at a significant yield premium-i.e. a higher yield-than for the market as a whole, and where it is trading currently on the notional dividend yield is pretty much in line with the market as a whole. On that single metric, we would have expected it to trade at a lower price.
Q191 Mr Bain: Could I address this question to Mr Zonneveld and also to Mr Robertson and Mr Cormack? A 38% mark-up in share price in a single day is one heck of an amount of froth. Can the panel confirm that this is a higher firstday markup than was the case with the IPO with RollsRoyce, the IPO with British Airways, the IPO with British Telecom and the IPO with British Gas? Mr Zonneveld, do you stand by the comment that you made in the Guardian on 25 October this year, when you said: "Despite the strong share price performance since listing, we believe there is still meaningful upside potential on a 12month view and beyond. We initiate coverage with a buy recommendation and a 570p target price"? Is this not further evidence that, frankly, these share prices were undervalued at the time of the IPO?
Gert Zonneveld: My assessment was to take the information that was in the public domain, value the company and come to the conclusion that it was an attractive proposition for our shareholders. My initial valuation range was based on where we would expect the shares to trade in the early days and weeks of trading. Subsequently, we initiated with a 12month view and an official target price and recommendation. If a company comes at a discount to a peer group, it sometimes can make up that difference very quickly; it can start trading at a premium to that peer group. That depends on many different things. Partly it depends on demand and where institutional investors value the business. In our case, our very short-term valuation target made the official price range look very attractive, and since then we have initiated. To put it this way, and to answer your question, yes, we would like IPOs to see a good, meaningful increase in the first days of trading. I am not sure there is an exact number I would like to put on that as to what would be a sensible increase.
Q192 Mr Bain: Can Mr Robertson and Mr Cormack explain why we have seen with this IPO the largest firstday pricehike in any IPO in decades in this country?
Richard Cormack: As I said earlier, there has been probably a little bit more volatility in aftermarkets this year than there has been in IPOs in previous times. To the context of your question, BT, British Airways and RollsRoyce were all up more than 30% on the first day; Royal Mail was up a percent or two more than some of those instances, but not dramatically more than those instances. What took the stock price higher in this instance was a relatively small number of institutions-and one of those institutions has been disclosed-buying up a large number of shares, which meant the capitalmarket dynamics took the price higher than we would necessarily have expected it to be.
Q193 Chair: Did you, in your consultations, consult with those companies that have driven up the shares?
Richard Cormack: We consulted with the market broadly, including institutions we understand to be buying the shares in the aftermarket.
Chair: So you did.
Richard Cormack: Yes.
Q194 Chair: And did you get any indication that they would be prepared to buy at higher prices?
Richard Cormack: We did not get indications that institutions were prepared to pay the levels that have been paid in the quantities that some of those institutions have bought.
Chair: Could I just rephrase that, or repeat it? Were they prepared to pay a higher price than the flotation price?
Richard Cormack: When they give us their orders, they give us their orders against the bookbuilding price range. We had discussions, as we talked about, as we moved up the price range in terms of investors’ sensitivities around the higher parts of that range. We are not able, when we build a book of demand, to solicit aftermarket orders and therefore to necessarily know where everybody’s price targets are in the aftermarket.
Q195 Chair: Given the fact that some of these institutions would appear to be the very ones that the Government did not want as longterm investors, did you in any way discount their interest?
Richard Cormack: We were certainly targeting the allocation at a longtermoriented investor base.
Chair: Did you, if you like, downgrade their significance or, in effect, their potential role in the aftermarket?
Richard Cormack: The allocations were certainly skewed to longterm investors as opposed to hedge funds, in line with the objectives of the allocation of the transaction. I do not think that policy of allocation materially, if at all, impacted the clearing price that we could have achieved.
Chair: But those other companies you knew could come in and buy those, even if you had tried to place those shares.
Richard Cormack: Of course. It is an open market. Once a stock is trading, anybody can buy the shares.
Q196 Mr Walker: A couple of times Mr Agnew has mentioned the fact that this has a very high proportion of retail shareholders and the fact that that may be having an impact on the volatility and other elements. That is something it has in common with that list of major privatisations in the past that William Bain mentioned earlier. Do you take the view, as advisers on this transaction, that that degree of retail interest is something that is affecting the price? Is that not something that could have been taken into consideration earlier in the process in terms of the listing price?
James Robertson: First of all, the retail offer, which was 750,000 people-the biggest retail offer for decades and done in quite a novel way, which I hope other IPOs will follow, in terms of online applications and such-was a great success. In terms of how it affected the price, one of the things that was important to us was that they were pricetakers-i.e. they had to accept whatever price we struck it at-so it was important that the ultimate IPO price was fair for the retail investors.
In terms of how they were going to affect the deal itself, it was a relatively significant deal-it was the third-largest deal in six years in the UK-and they had a third of it. In previous IPOs, they have sold quite a lot and there was quite a lot of sagging; in this IPO, only 20% of those retail investors have sold, which is only around 6% of the company. We did factor it in, but the main impact it had was a logistical factor-of making sure we could get almost 700,000 people shares in the company.
Q197 Mr Walker: Given you could have looked at the newspapers any time in the weeks running up to the IPO and seen a lot of the newspapers saying, "This looks like a great buy; this looks like a great thing," surely there was an understanding that there was likely to be strong retail demand even after the IPO itself.
Richard Cormack: It is fair to say that the transaction had a very high profile in the media, but the more positive commentary came in the closing days of the transaction. It was a much more balanced commentary in the weeks leading up to the deal, but in the closing days, statements in the press and commentary in the press certainly increased the retail enthusiasm. That was really in the last three or four days, as opposed to the last few weeks.
Q198 Chair: You say that was unbalanced.
Richard Cormack: I would say that, in the latter days of bookbuilding, a vast majority of the press was recommending the merits of the investment and highlighting the potential value of the investment as opposed to probably a more balanced commentary prior to that.
Chair: But given the subsequent price, it would appear that, in effect, that was a reasonably balanced view.
Richard Cormack: I am just commenting on positive versus negative.
Q199 Chair: Yes, I know what you are commenting on; it is the way you are commenting on it that I am commenting on. It does not seem to accurately reflect the valuations given, the implication being that those that were given immediately prior to the flotation were in some way imbalanced, and in actual fact, if anything, they understated the value.
James Robertson: We always realised it would be attractive to retail. This is a situation where a lot of people are only getting a very small percentage on their money in the bank, and this was paying a 6% yield. It was one of the objectives of the Government to have a wide-ranging and successful retail offer.
Q200 Mr Binley: Bearing in mind all your careful advice to the Secretary of State, which he clearly accepted-so he should; he was paying a lot of money for it-and bearing in mind all of that advice was based on your wonderful intelligence-collecting machine, do you feel that the investors might have conned you with their feedback to you, and that that con worked to their advantage but not to the taxpayers’? Will you consider looking at your various intelligence-gathering, resultarrivingat methodologies to make it more effective in the light of what happened on this occasion?
Richard Cormack: The book-building process was designed to try to find the clearing price for the 600 million shares on offer and to be able to place those 600 million shares with a broad and balanced institutional investor base that would provide a platform both for the Government-
Q201 Mr Binley: Mr Cormack, let me stop you. I was in the business of selling beer years and years ago. Anybody can sell cheap beer. That is one of the hallmarks of the trade and of any trade. What I am suggesting to you is that you got this sizeably wrong, on the basis of Mr Bain’s question to you. Should you not now be looking at your product to ensure that the next time you sell, you sell to a satisfied customer a better product? It is a simple question.
Richard Cormack: I understand the question, and I was attempting to answer it.
Mr Binley: In a very longwinded way. Carry on.
Richard Cormack: I apologise. We were seeking a broad-based distribution of longterm investors who would support both a further sell-down by the Government but also the company’s access to the capital markets. The investor base that has been buying in the aftermarket is not necessarily reflective of where we would have been able to find a clearing price with that broad-based support.
Mr Binley: What is the answer to my question? Will you look at your mechanisms-your methods-to decide whether they need changing, in the light of the fact that you fed back information that was not helpful to your customer and was not correct?
Richard Cormack: The process that we went through was broadly the right process.
Mr Binley: As a buyer, I really would be very suspicious about your sales pitch. Mr Chairman, I will not continue.
Q202 Caroline Dinenage: I have a quick question on a similar vein. This is a slightly different type of clientele. With the massive number of retail purchasers for these shares, it is a bit like the Grand National of sharebuying, in that people who would not normally bet on a race would bet on the Grand National, and people who would not normally buy shares would tend to invest. Is that correct?
James Robertson: That is correct. Two-thirds of the people who applied for shares applied through their intermediaries-i.e. share shops-and they were people who probably already had shares, but a third of the people who applied applied directly online or through the post. They were people who may have had other shares, but, equally, as you said, may not have been serial investors.
Q203 Caroline Dinenage: Presumably the value of the shares is quite selfperpetuating, because these are the sorts of people who are more likely to take advice from their friends and neighbours and other people who have invested, rather than from the financial pages of a newspaper. Would that be correct as well?
James Robertson: It is difficult to say where they get it, whether it is the Mail on Sunday finance section or their friends who have bought and said, "Why do you not buy?" I suspect it is from a lot of sources. Particularly when it is so high profile, I think people do discuss it.
Q204 Caroline Dinenage: The highprofile thing is a massive issue, which is why my questioning is really along the same line as Brian’s. This is a very different type of flotation; it is a very different type of share offer. There are definitely lessons to be learnt as to the clientele and the way that this is marketed, and not necessarily taking all our advice from how things are predicted to go in the financial media. Would you agree?
James Robertson: You are right in saying this was a uniquely difficult and risky IPO, and I am sure there will be lessons learnt for how to execute these in the future. I do not think we should confuse it with a normal IPO, where a company has got a track record of profits and does not have IR risks. Those are easier things to do than Royal Mail, which is a very big company, with a very big IPO, with unique risks and, on top of that, the largest retail offer that has been done for decades.
Q205 Caroline Dinenage: But there have been similar selloffs in the last 20 years that potentially lessons could have been learnt from.
James Robertson: I absolutely agree with that. The difference between 20 years ago and now is that the capital markets have changed quite a lot. There are more US investors coming in, there are more hedge funds and there are more market commentators. It is less of a UKtype IPO market and more of a global IPO market with some quite different types of investors who can take some quite strong views.
Q206 Chair: Can I just ask Goldman Sachs, before I bring in William Bain again: you consulted with investors, and you presumably put a report to the Government. Is that correct?
Richard Cormack: Yes.
Chair: This Committee would very much like to see that report. Are there any problems with that?
Richard Cormack: That report was provided to our client in commercial confidence. If the Committee would like to see it, we should discuss with our client and the clerk what we can do.
Q207 Chair: So, those who are, if you like, the major beneficiaries of this can determine whether we feel that the process unfairly benefited them as opposed to the taxpayer. Would that be a fair summary of the process?
Richard Cormack: I am not sure I follow the summary.
Chair: What I am saying is that if you consult with the clients-and presumably they object to it being-
Richard Cormack: Our client is the Government; it is the Secretary of State.
Q208 Chair: Sorry. In effect with the Government, yes. We can raise this with the Government, and indeed will be doing so, because, as I see it, the Government acts on the basis of your advice. If you have got it wrong, the Government then takes the flak for it. As the organisation monitoring the Government’s performance on this, we need to be able to have a look at that and make an assessment as well. I appreciate that is perhaps beyond your particular remit today, but I just flag it up as an issue that we will be looking at.
Q209 Mr Bain: Can I address this point to Mr Robertson and Mr Cormack? According to the Secretary of State, you advised against raising the offer price in the final weeks before the IPO. Given the anticipated extremely high level of demand, can you explain what your reasons were for this decision?
James Robertson: It was in the final days. We set the price range and then, in the days leading up to 8 October, which was when the IPO closed, we advised the Government that we believed that we could have got an extra 20p above the 330p before the demand from the longterm investors would have fallen off very sharply and it would have been unlikely we would have been able to get 600 million shares away. We considered that very carefully, because 20p is a lot of money. We had to balance that against the risks of extending that price range.
There were a number of factors we brought into account. Firstly, extending the price range had only been done once in the last 13 years in the UK market. Secondly, we would have had to have offered withdrawal rights to 750,000 retail investors. Logistically, we had planned for that, but that had never been done before and carried certain risks with it in terms of the execution. Thirdly, the US default was a few days away, and one of the things in the IPO market is that momentum can go both ways. We saw on this transaction the momentum went very positively in the right way, but, equally, that sort of momentum can evaporate and go the other way very quickly. There was a concern that, if we moved the price range up and we had to delay the deal by some days, both the US default and the ballot due on 15 October could have gone the wrong way, and momentum could have evaporated and gone the other way, and we could have risked not being able to get the deal away.
Q210 Mr Bain: That is a very interesting point, because the Secretary of State went on to argue that you subsequently advised of "a volatile aftermarket with the risk of a significant (upward) spike in share price"-that is what we have seen-"the likely shortage of initial supply of stock as the book was very longterminvestor focussed" and a "considerable media interest that was predicting a substantial firstday premium". He did not mention the issue of default. Given all of these factors, do you think in hindsight it was wise to advise against an increase in the offer price?
James Robertson: It is always easier to judge these things in hindsight. When we were sitting there on the Friday, over the weekend, on Monday the 7th and on Tuesday the 8th, when we were discussing things in detail-because we did not take the chance of getting more money for taxpayers lightly at all-and looking at all the risks and comparing that against where we thought we could increase the price to, on balance we chose to stick with 330p and execute it then.
Q211 Mr Bain: Was that an assessment that was shared by the Secretary of State? Did he specifically discuss that proposal with you?
James Robertson: We discussed that with the Shareholder Executive and with Lazard, who were the independent advisers, and they discussed that with the Secretary of State, I understand.
Q212 Mr Bain: That is very interesting. Under the agreement, you still have the entitlement perhaps to receive a £4.2 million discretionary payment. Do you think that is a decision that taxpayers would be likely to accept with open arms?
James Robertson: That is for the Secretary of State to decide. It is in his gift.
Q213 Chair: Who made the final decision on the share price?
Richard Cormack: The final decision was made by the Secretary of State and the Government.
Q214 Chair: Was it totally consistent with the advice given by UBS and Goldman Sachs?
Richard Cormack: It was consistent.
Q215 Caroline Dinenage: I would really like the view of every member of the panel on this, please. The Government retains a significant shareholding in the Royal Mail and has stated that it does not see any long-term reason why it would want to keep those shares. Given the current price of them, would each of you individually tell me whether you would advise the Government to sell them now, keep them, or a little of both?
John Mayne: I believe there is a lockup for six months when they cannot sell any more shares. After that timeframe, I would look at the marketplace and see the conditions then to see what the appropriate advice at that stage should be.
Caroline Dinenage: If the conditions then are as they are now, for example, what would your advice be?
John Mayne: If the equity market was strong and the share price was deemed to be fair, then there would be a debate around whether it was a good time to sell shares, and it might well be then.
Caroline Dinenage: So your advice would be that it would be a good time.
John Mayne: I would be asking the Government what their intentions were and what their aims were, but certainly, on the outside looking in, it could be that advice, yes.
Ben Story: I would agree. You cannot give advice in a vacuum; you have to understand the aims and objectives of the shareholder. As an outsider to this process, if the share price remains at this level and the market conditions are strong, it may well be a good time to sell.
James Robertson: Yes, I think the price would be right. The one caveat I would have is that at the moment, we are trading 1 million or 2 million shares, often to hedge funds out of the US, and it would be very difficult to sell at this price. It needs more time to both season the stock and have more long-term or longonly investors starting to participate in the market before you could sell confidently at a decent price. The other point to make is that there is a lockup for 180 days and we think it is unwise for the Government to break that lock-up, given the fact that it gives other lockups in some other situations where it is selling shares, and it is a sort of contract with the market.
Richard Cormack: I do not have a different view. The Government retains 30%; that is one of the highest residual stakes that they have held in privatisations, which provides them access to the benefit of the aftermarket. When they ultimately sell should be determined by a number of objectives, including where the price is at the time.
Gert Zonneveld: Clearly, it is down to the Government. If they do not wish to be a long-term investor in Royal Mail Group, there is no reason to hold on to the stake, unless there is a reason to believe that the share price at the time is not close enough to the perceived fair value of the company. If there is any reason to believe in the near term that there is a potential upside in the share price, for example, then it can wait, but, apart from that, assuming a normal valuation, there is no reason for the Government not to sell.
James Agnew: It is very difficult to add to what has been said, but the lock-up is in place through until April next year and there are windows when it is easier or more difficult to sell shares. The Government might well have to wait until the results for the current year were available before it was able to move.
Q216 Mr Walker: The UK Government is no longer the only government institution that owns shares in Royal Mail; there are a number of sovereign wealth funds that have bought in. There has been a certain amount of media attention on that. You have talked a lot about the desire to get longterm institutional investors. Were sovereign wealth funds targeted as key institutional investors? Were they treated any differently to any other investors in the market?
James Robertson: No. As Richard said, since the beginning of this year we have seen 65 different investors. They were global. They were the biggest asset managers in the world and the people who are most likely to invest in IPOs. That included some sovereign wealth funds. They are very big asset managers these days. One of the things that has changed since the privatisations of the 1980s and 1990s is how much money they have got to invest. They are entirely appropriate people for the company to go and meet and to market the company to. They are one of a number of a broad range of institutions that ultimately bought shares in Royal Mail.
Mr Walker: So they were treated in exactly the same way as other investors.
James Robertson: Yes, completely. They were treated in exactly the same way. They are longterm investors. They may have a sovereign wealth fund moniker on top of them, but they are longonly institutional investors, like many of the other famous names.
Q217 Mr Walker: Have they been stakebuilding since the initial listing?
James Robertson: I think you have seen that one of them, GIC, has announced a stake of above 3%.
Mr Walker: You do not think that is necessarily a matter for concern at all. That is something that there is a certain amount of public concern about.
James Robertson: I do not think the nature of the institution itself should be a concern. It is the Government of Singapore. They are successful investors across a broad range of companies globally.
Chair: Can I bring in Mike Crockart now on disposal of assets?
Q218 Mike Crockart: It is something there has been a great deal of speculation in the press about, particularly around Mount Pleasant, Nine Elms and Paddington, a total of 22 acres of prime property, much of it in central London. When each of you were doing your valuation of the company, how much did asset values and potential disposals affect that valuation? Did you all assess those assets when coming to your valuation? I am going to ask Gert first, because you have been quite vocal about this and your view that those assets were undervalued.
Gert Zonneveld: No, that is not quite correct.
Mike Crockart: That is certainly how it has been reported.
Gert Zonneveld: Do not always believe everything you read in the press.
Mike Crockart: Absolutely.
Gert Zonneveld: I did not include specifically any sort of excess valuation for the property portfolio. In fact, I was very surprised to read about some of the numbers quoted in the press, which is why I looked in slightly more detail with our property analyst at what this property could be worth. I included in my note an assessment of what I thought the land value of those three centres would be, and that was a value of around £340 million. It was more to defuse the situation and to say, "These buildings that you are reading about in the papers, those numbers are just not realistic." The actual value of the land, as to what Royal Mail could get for them, in my view is somewhere over £300 million, which is a significant number but we have not separately included it in our valuation.
Mike Crockart: Is that the same for others?
James Agnew: We did not include any value for surplus property. As I referred to earlier, the valuation bases we used were essentially around earnings and cash flow, and at the time we did our desktop valuation, the information did not disclose anything about surplus property, so we did not include anything for that in our valuation at that time.
Q219 Chair: Could I just interrupt there? There was no information available. Is that correct?
James Agnew: There was nothing in the public information that we had to indicate specifically that the property was surplus.
Mike Crockart: Can I go on to Richard and James?
James Robertson: In the pitch process there was no information because the prospectus had not been published at that point. We included £200 million for excess property valuation. To put it in context, if we are talking about the Nine Elms site and the general property, over the last three years the Royal Mail has sold £500 million worth of excess property, and that has gone to taxpayers. It was made very clear by the Royal Mail management that there was another £100 million of excess property that they were going to sell over the next three years, so the investors should factor that into their valuation. The bit that was less explicit was the Nine Elms site, etc. Our analysts, when they went round and talked to investors, put a value of around £300 million on the excess property, and the prospectus included detail on those three sites so that investors could make up their minds in terms of what they thought that value was.
It was difficult for us to put a straight number on it because it is so uncertain; it is a long way away, they have not got planning permission, they have not done the remediation, and they have not worked out where they are going to decamp the people who currently work on that site, so there was a decision taken not to put a fixed value on it. The number that we could point to was BNP Paribas’s valuation of the excess value of the property for alternative use above the book value. The book value in the prospectus was £750 million; BNP had said there was another £310 million of excess value across the portfolio as a whole. That was all the disclosure that we had so the investors could factor that into their valuation.
Richard Cormack: That is a good summary.
Mike Crockart: What about the remaining two? In your valuations, how much did you factor in for disposal of assets?
John Mayne: At JP Morgan we did not, back in May.
Mike Crockart: You did not.
John Mayne: No. In the same way that James referred to earlier, our focus was far more on the earnings and the dividend yield. We did not take into account any surplus property that might be available.
Ben Story: At Citi we were in exactly the same position. There was no disclosure on the surplus property. It did not factor in our valuation note that we made back in May.
Q220 Mike Crockart: I find it quite surprising that such a major part of potential value of a company, especially one that is asset-rich, would not factor into your valuation.
Ben Story: Speaking for Citi, we had no information on the surplus property. At the time of making a submission in May, that information was not available to us, so it was not something that we could factor in. When you look at logistics companies in general, property can be an area, and it is something that you look at when you give advice in a situation like this.
James Robertson: Can I just help? The annual report that contained the valuation by BNP was not available until June, and the pitch, when they were giving their valuations, was in May.
Q221 Chair: I find it quite astonishing that a company that is, as Mike said, very asset-rich did not provide information to prospective investors on the level of assets it had. Is that normal?
James Robertson: We did provide that. In the prospectus, there was the book value, which was the £750 million of the freehold, plus another £300 million of the long leasehold, the BNP excess valuation of the property, which was £310 million, and we did set out the details of Nine Elms and Paddington as excess property. The point I would make is that this is not an asset valuation. The book value of the company, taking all of its assets and liabilities into account, as of March was £1.5 billion. The company is worth significantly more than that. What people are paying for is the earnings, the cash flows and the dividends of the company. You are absolutely right that the excess property is excess value beyond those cash flows, and we set out the details of that in the prospectus so that investors could take a view on it.
Q222 Chair: But that information was not available before the opening pitch process.
Richard Cormack: Not the pitch process, but it was available to investors at the time when they made their decisions.
Chair: Right. It does seem a rather odd way of going around it.
Q223 Katy Clark: There are 2,000odd properties that Royal Mail owns in the UK. Every single one of us will probably have a number of sites in our constituencies. What we would have expected would have been a full list of those properties. Some are owned by Royal Mail; some are owned jointly with the Post Office. Focusing specifically on UBS and Goldman, because I appreciate the others of you just were not given information-which we do find surprising-can you tell us how you took those assets into account when you valued Royal Mail and the extent to which you relied on property professionals? Did you get a range of comparator valuations? Did you explore that avenue at all, or did you just proceed in the method that has already been outlined?
James Robertson: The value of the Royal Mail is much more than just its property. The value of the Royal Mail is in its people, in its network, in its long history and in its brand. The properties are a small part of it. They facilitate the men and women of the Royal Mail to go out and produce that service. The value of the property that is used every day is less relevant than the cash flows of the business. The excess property, you are absolutely right, is important in terms of looking at the value, and we set that out in the prospectus.
Richard Cormack: The whole property portfolio was valued. The company have that valued on a routine basis. It was valued by BNP Paribas.
Q224 Katy Clark: Yes, and that was on a retained basis and perhaps was carried out for accountancy purposes in the way that any organisation may do that. That is quite a different exercise to valuing for these purposes. Your client is the taxpayer-it is the Government. We owned those properties. We no longer own those properties. A lot of us fear that what we are going to see in our own constituencies is assets being sold off, probably at quite a great profit to Royal Mail, and we will not have seen the benefit from that. That is where the taxpayer is coming from. I am sure you fully understand that.
Richard Cormack: I understand that.
Katy Clark: There is a real concern that that land throughout the country in all sorts of different places that could be marketed to be worth quite a lot of money may be sold off. It may actually be in the company’s interest to sell off some of that land, because they could make quite a lot of money, perhaps more than for the excess land that is normally sold off in the public sector. Can you maybe go through why it was you came to the valuation you did and say what you think the gap would have been if there had been a more true valuation?
Richard Cormack: I cannot comment on the second part of the question; I am not an expert in that field. The company is of the firm view that the existing property portfolio is required in order for it to undertake its operations, with the exception of the London development portfolio, which are seen as excess and therefore may be sold off, and those were the subject of the excess valuation report.
Q225 Katy Clark: If we just stick with the excess that you are talking about, was it just BNP Paribas you got quotes from in terms of the companies up and down the country, or were there other organisations that have got expertise in the property business that you got valuations from?
Richard Cormack: BNP Paribas valued the portfolio as a whole. The company commissioned Jones Lang LaSalle to value the three London sites.
Katy Clark: Royal Mail did that.
Richard Cormack: Royal Mail.
Q226 Katy Clark: So you are saying Londonspecific arrangements were made with one organisation; in terms of the rest of the country, there was no attempt to get some comparative estimates of what the value of the properties might have been.
James Robertson: You might need to ask that of the Royal Mail. What is important to note is that there was an understanding some years ago that there was value in the property and there was value in some of the properties that were not fully utilised, and so the Royal Mail some years ago started an active property management programme. That resulted, in the last three years, as I have said, in more than £500 million worth of property being sold and that cash being returned to taxpayers. They are 80% through that. The last £100 million of those excess properties are going to be sold in the next three years. Clearly, as you said, the company has been sold. How we made sure taxpayers got value for that £100 million was to make it very clear to all the investors, "There is another £100 million of cash you should factor into your valuation." The important point is that three years ago, the Royal Mail realised there was this excess value, as you have rightly pointed out, and spent the three years before the IPO disposing of that for the benefit of the taxpayer.
Q227 Katy Clark: If we set aside the excess property, in terms of the property that would be left, are you saying you did not really see it as your job to put a proper valuation on what that property was worth?
James Robertson: We were told that all that property is required for the Royal Mail to carry out its daytoday operations.
Katy Clark: So you did not go through an exercise of trying to value that property other than looking at the BNP Paribas figure that you were provided with.
James Robertson: No.
Q228 Chair: If I were buying something like Royal Mail-heaven forbid; I will never be in a position to do so-I would have expected a list of properties and a robust valuation of their potential sale price. I am not just talking about the three in London, but about the vast number of properties that Royal Mail has. Did you ever see anything like that? Was that ever provided?
James Robertson: The Royal Mail have that, I am sure.
Chair: No. Did you see that? Was it in the prospectus?
James Robertson: It was not in the prospectus, no. The book value of the property is in the prospectus. However, all of these properties are for the ongoing operational use of the company. They cannot do without them. Their value is in what they provide in terms of running the business and providing the profits and the cash flows to the taxpayer or to investors.
Q229 Chair: Yes, but it is quite reasonable to assume that under private ownership there would be a considerable restructuring, so it would still have been very helpful to have a list of those values, would it not?
James Robertson: We understood from the Royal Mail that, apart from the £100 million we talked about, all of those properties are needed to run the Royal Mail on an ongoing basis.
Q230 Chair: But they would still have an asset value if they were sold. Are you saying you do not think any of those will be sold?
James Robertson: We have been told that they are all required to run the Royal Mail.
Q231 Chair: Right. We may be asking questions on that to the Minister. Do any members have any other questions? Can I just conclude with a question to Goldman Sachs? Am I right in saying that in the United States there has been a very longrunning litigation involving Goldman Sachs over the undervaluing of IPOs? I believe it has just been concluded but would not have been concluded at the point that you made your tender. Is that correct or not?
Richard Cormack: I am not aware of any details on that.
Chair: You are not aware of a 12yearold court case involving your company undervaluing IPOs in the United States.
Richard Cormack: I am not. I can come back to the Clerk with details.
Q232 Chair: I find that quite astonishing, but, as far as I can tell, that is the case. Would the Government have been aware of it?
Richard Cormack: I cannot answer for what the Government was or was not aware of.
Chair: No. Fair enough. Thank you very much. That concludes our questioning. Thank you very much.
 Note by Witness: If the incentive fee of above-mentioned 0.45% was paid in full, the total for all banks would have been £12.6 million.