By Mark Kleinman, City Editor
Vince Cable, the Business Secretary, has rebutted claims that he cost taxpayers hundreds of millions of pounds by undervaluing shares in Royal Mail, arguing that the price of the privatisation should be assessed only after the Government has sold its entire stake in the company.
Sky News has obtained a letter sent by Mr Cable on Friday to the Business, Innovation and Skills (BIS) Select Committee, in which he dismisses concerns that the sale of the postal operator was spectacularly mispriced.
Mr Cable and the Government's investment banking advisers have been accused of undervaluing the company after seeing its share price rise by 38% on its first day of trading.
"Value for money has been central to our strategy as we have taken forward the sale of shares through an initial public offering," he wrote.
"Delivering value for money is about more than just the level of proceeds received on day one.
"Our long-term strategy to safeguard the universal service and deliver value for money for the taxpayer involves not only getting good value for the initial stake sold but also getting good value for the residual stake held by Government (30% of the Company assuming exercising in full the Over-allotment Option), and leaving Royal Mail in a strong, sustainable position capable of accessing the capital markets in the future."
Mr Cable said that the initial price range for the flotation, which attributed a value of between £2.6bn and £3.3bn to Royal Mail, was recommended by Goldman Sachs and UBS, the lead banking advisers, and endorsed by Lazard, which provided independent advice to ministers.
"In August 2013, as the date of the IPO approached, this list of potential investors was narrowed down to a focused group of approximately 20 investors, selected on the basis of feedback gathered during the investor engagement process and, in particular, their understanding of the risks inherent in the Company's industrial relations," he wrote.
The timing of the disclosure that unions would ballot Royal Mail workers for strike action, which was voted through this week, meant that some potential investors in the company indicated that they would opt not to buy shares, the Business Secretary added.
Royal Mail's share price has been mildly buffeted by the vote in favour of industrial action next month, but the stock continues to trade well in excess of the 330p-a-share offer price.
Mr Cable told MPs that the top end of the price range was set because it was "compatible with securing a stable, long term shareholder base as a foundation for achieving value in future sell-downs of the Government's retained stake whilst also taking into account the material risks associated at the time with the ongoing IR situation and the market risks arising from possible US default and the fact that the recent IPO of BPost (a recently-listed Belgian peer) was trading below issue price".
In his letter to committee members, Mr Cable argued that the flotation price placed Royal Mail in a similar dividend yield bracket to comparable companies, but said the "considerable media interest that was predicting a substantial first day premium" was a factor in the initial surge in its share price.
The Business Secretary also sought to counter claims by his Labour opposite number, Chuka Umunna, that Royal Mail's property portfolio could be worth more than £1bn.
"Taking into account the overall position of the surplus portfolio and the relative immaturity of these sites in terms of actual development, a combined value of £330m (as suggested in one of the equity research analyst reports) appears at the top end of any likely range," he wrote.
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