Oral evidence: Royal Mail Privatisation, HC 710-ivTuesday 29 April 2014
Oral evidence, 29 April 2014.
Witnesses
Rt Hon Vince Cable MP, Secretary of State for Business, Innovation and Skills, Rt Hon Michael Fallon MP, Minister of State for Business and Energy, Department for Business, Innovation and Skills, Mark Russell, Chief Executive, Shareholder Executive, and William Rucker, Chief Executive, Lazard London gave evidence.
Chair
Good morning, and thank you for agreeing to help us with our inquiry into Royal Mail, following the publication of the NAO report. For voice transcription purposes, please introduce yourselves, starting with you, Mr Russell.
Mark Russell
Mark Russell from the Shareholder Executive.
Michael Fallon
Michael Fallon, Minister of State for Business.
Vince Cable
Vince Cable, Secretary of State.
William Rucker
William Rucker, Lazard.
Chair
Thanks very much. It was our intention to have the Ministers here today. Obviously we welcome the support given by Mr Russell and Mr Rucker, but I would just remind Ministers that, in line with the long-standing philosophy, advisers advise and ministers decide. Our questions are primarily directed at the Ministers rather than at the advisers. On 1 April, Secretary of State, you said the NAO reached the “important conclusion that we had successfully achieved our objectives”. The NAO also said that this was in part due to “shares being priced at a level which was substantially below that at which they started trading”. Do you agree with that conclusion?
Vince Cable
The point you make at the end is simply a statement of fact. Obviously I agree with it, but the basic conclusion that we were successful in our objectives is correct. When I gave my statement to Parliament in the immediate aftermath of the sale, I made the point that as a consequence of it—and these are the figures that were endorsed in the NAO—there had been a cash receipt of about £2 billion. The residual stake, which was also an important part of our calculation of value, is now about £1.6 billion. Had we not succeeded with this sale—had the sale flopped, and there were serious risks around it, which have been well rehearsed—we would have been left with an asset that was worth an estimated £1 billion.
Chair
We will explore these issues in a moment.
Vince Cable
That is the arithmetic on which our judgment is based.
Chair
It was also true that the NAO said that, after the flotation, the price level indicated that Royal Mail shares were worth “much more than this process was able to extract”. Do you disagree with this statement?
Vince Cable
Yes. I think that the issue here is the circumstances at the time of the sale, which is what influenced the judgment of the flotation, and the circumstances that obtained five months later, as you say. Five months later, the threat of major industrial action, which was a key material factor, had ceased to exist. The major threats to the world economy that were prevalent in the autumn were no longer in existence so, clearly, the objective factors had changed very substantially. None the less, it is true even now that there is a very high level of volatility in the share price, and the people who make target forecasts have a very wide distribution—I think one of the widest in the FTSE—which suggests that this is still a fragile company with a volatile share price.
Chair
It is fair to say that, volatility or not, the price has been consistently hugely above that determined as the top price at the flotation level. Why did the Government not change the timing of the process, given the uncertainties that you have outlined in the economic background to the timing of the flotation?
Vince Cable
That was certainly an option that we thought about, as you would expect. Michael Fallon and I challenged the advice we were being given on a whole variety of issues: on price, on quantity of sale and indeed the merits of postponement. We did our job of challenge, and it was very clear that postponement would not have served our objectives. One of the key uncertainties at the time of sale was over the industrial action, and the union had made it absolutely clear that, if the sale was postponed, the strike would be postponed. It would not have helped solve that particular problem. We could well have found ourselves in the position of trying to accomplish a sale subsequently in significantly worse conditions. Those were the considerations that we gave careful thought to and decided to proceed as we had planned.
Chair
There is an issue about how much significance the bidders put on industrial action, but I think we will probably explore that in a moment. Could I just say that value for money was described by Mr Fallon as “delivering a financial outcome for the taxpayer, which when considered in the context of the overarching policy objective, represents overall value for money”. Given the number of caveats within this statement, what are the criteria that were used to measure your actions against these objectives?
Michael Fallon
The primary objective was to secure the universal service—to ensure that Royal Mail did not have to come back to the taxpayer for support and that it was put on to a long‑term sustainable footing, as recommended by the Hooper report some four years previously and as approved by Parliament in the Postal Services Act 2011 some two years previously. That was the primary objective, and obviously we wanted to deliver that in a way that also delivered best value for the taxpayer.
Chair
It was necessary in order to achieve that primary objective to considerably undervalue the shares.
Michael Fallon
I have not seen any evidence that the shares were undervalued at the time of flotation. Have you?
Chair
I think the fact that they were bought at a 38% premium on the day would have been considered by most right‑thinking people as reasonable evidence that they were undervalued. The consistent share price that has been obtained since, notwithstanding any volatility, also seems to underline that.
Michael Fallon
I dispute that, Chairman. I would expect a successful flotation to go to a premium on the day of launch. An unsuccessful flotation would fall below the offer price.
Chair
Normally, 10% to 15% is the accepted range. This is way above other flotations.
Michael Fallon
Let us look at the record. Of the 43 major flotations in the last four years, 21 of them fell below the offer price on the very first day. 23 of them in fact are still below the offer price. Four of the six large flotations since Christmas are below their offer price at the moment. Floating a company successfully is not a particularly easy thing to do. Most flotations that are successful involve some kind of premium on the first day, and Royal Mail was no exception.
Chair
The figures produced by the NAO show that, since 2012, in something like 20 there were four below and the rest were way above, including Royal Mail at 38%, far in excess of any of the others. Most people would think that a reasonable basis for observing that the shares were undervalued.
Vince Cable
Can I just add to Michael Fallon’s comment? We are talking about a much larger group, but even extremely influential brands like Facebook had this experience. We are talking of much larger numbers of companies that attempted IPOs. Some were complete flops and others had great difficulty. There were very serious risks around this whole process, and those were the facts that we took into account.
Chair
Facebook is often quoted, but the fact remains that, looking at the major privatisations—and some of them were quite major—over the last two years, they were consistently above the flotation price, and Royal Mail exceeded all those that had been consistently above it. That would provide a fairly robust evidence base for the assertion that these shares were undervalued when they were floated.
Michael Fallon
I do not accept that. This was a successful flotation. We expected it to go to a premium on the first day. You would certainly have been critical if it had been wrongly priced and had fallen below the offer price, and people had lost a great deal of money, including the employees who worked for the company. This was the biggest privatisation for years. It was the biggest IPO in Europe for two and a half years. It was an extremely large offering. It was very important to get it away successfully, and we did that.
Chair
You put your finger on it: the departmental approach seemed to be to do everything to ensure that it was sold. Value for money for the taxpayer was a secondary interest.
Michael Fallon
No.
Chair
Where in the criteria that you set to your advisers was it indicated that taxpayers’ value for money should be a consideration?
Michael Fallon
Value for money is in the objectives that you read out yourself, Chairman.
Chair
The implication is that, by privatising it, as a matter of faith, it was better value for money for the taxpayer. That seems to be the underlying approach.
Michael Fallon
This was not a matter of faith. This was Parliament’s decision that Royal Mail would be better served by having access to private capital to put it on to a sustainable footing. This was a turnaround company. It is important to remember that.
Chair
You made a decision about the share price.
Michael Fallon
We did.
Chair
Parliament did not make it; you did.
Michael Fallon
We made the decision about the share price.
Chair
That is the issue at stake.
Michael Fallon
Fine. I stick by the share price.
Vince Cable
The key point, Chairman, if I might, is that of course the share price at the time of issue was a component of value for money. It was an important component, but so was the residual value of the shares that the Government still has. Crucially, the calculation that was made about the residual value of the company, had it remained in public ownership, is of a very depreciated asset. There are three components of value for money and you are focusing, quite properly from your point of view, simply on the first. The other two are equally relevant.
Chair
We will talk about the residual share in a moment, because there are issues surrounding that, but I believe Ann wanted to come in with a supplementary.
Ann McKechin
I just wanted to question you a bit further, Secretary of State. You have said that the state of industrial relations had a major impact on how you set the price. Who carried out the assessment of what effect the industrial relations within the Royal Mail would have on price?
Vince Cable
The assessment of the price, which I think we described when we came to your Committee before, was partly based on long‑run fundamentals by comparing the Royal Mail with comparator companies. It was also based on a pricing survey amongst 500 potential investors, many of whom did not come into the sale.
Ann McKechin
You did not ask the investors about industrial action.
Vince Cable
Clearly, the industrial relations history and also the immediate threat of industrial action weighed heavily in that.
Ann McKechin
How many days’ business had been lost in Royal Mail due to industrial action in the previous two years?
Vince Cable
There is a constant threat of industrial action.
Ann McKechin
How many days were actually lost?
Vince Cable
I suspect relatively few.
Ann McKechin
Relatively few. So, you had a company that had an increasing profit and a reasonable degree of industrial relations, and you thought there was going to be a car crash on the price.
Vince Cable
If there were reasonable industrial relations, there would not have been a threat of a strike holding over the company. You can question the arithmetic of this, but I think it was plausible: it was calculated that every day of industrial action, had it been forthcoming—and the union made fairly clear they intended it to happen—would have cost the company about £30 million. After two weeks, the profits of the company would have been wiped out. Those were the kinds of calculations that had to be made.
Ann McKechin
You simply made that assessment within your Department. No other external expert was brought in to assess the state of negotiations and what the real risk was, because most people considered that a settlement was more likely than full‑out industrial action.
Michael Fallon
I met the unions at regular intervals throughout the process once it got under way: last autumn, in autumn 2012 and throughout 2013. I met them very intensely through the summer of 2013. It was clear to me they had absolutely no interest in lifting the threat of strike action or in settling the pay deal. The pay deal was overdue; it should have been done by the end of March 2013. There was no prospect of it being settled and being settled before privatisation.
Ann McKechin
The NAO reported that this company had significant cash flows, so it was cash rich. It would have been anticipated that there would have been room and flexibility to achieve a settlement on pay, which was subsequently achieved very shortly after the sale of the shares. Did no one carry out an assessment on that basis?
Michael Fallon
We are talking about a company that lost money in six of the previous 12 years.
Ann McKechin
It was cash‑rich according to the NAO report.
Michael Fallon
If I can just finish, Chairman, it lost £110 million in 2011. It has lost a cumulative £1 billion over the last 12 years. It was a company that was incredibly unstable and had very challenging industrial relations. You will recall the previous disruption leading up to the three‑year agreement that expired in March 2013. When I arrived in the Department, I was told there was a prospect of negotiation in January 2013, in February and in March. I was then told it might be possible in May, June and July. It was obvious to us that there was no prospect of a pay deal being agreed before privatisation,
Ann McKechin
There had been no all-out strike either.
Michael Fallon
It was also obvious to us that the challenging nature of industrial relations in Royal Mail was a big factor in the approach that potential investors had to it. Indeed, I am very surprised that you have not called the union in to take evidence on that point.
Chair
We may yet. What evidence have you had from those companies that contacted you during the book‑building process that industrial relations were a factor in determining the level of prices at which they were prepared to buy these shares? Have you any hard and fast evidence, other than what seems to be the mindset of the Department, on this?
Michael Fallon
It is nothing to do with mindset; this was in the report of every single engagement that we saw between the company and potential investors. Industrial relations were mentioned the whole time as being a challenging feature of this company.
Chair
Do you have any written evidence that you could give to the Committee to substantiate that assertion?
Mark Russell
I can say, in terms of the original marketing of this, a significant number of institutions simply said they would not invest unless a pay deal was agreed.
Chair
Shall we say it does not seem consistent with what actually happened when there were industrial relations and actually whether it would be the specific companies? Overall the share price rose, so it would appear that somebody was telling you something, if they were telling you this, that was not actually consistent with their intention.
Michael Fallon
The share price rose, Chairman, when the three‑year pay deal was finally signed, but that did not take place until after the sale.
Chair
It continued rising throughout the process.
Vince Cable
The Minister is obviously not in direct contact with the investors.
William Rucker
In terms of direct contact with the investors, the industrial relations issue was a perpetual theme. Right up to the end there was the question as to the cost of industrial relations, if it happened, and also the likelihood of it. That was a constant factor in nearly all of the investor meetings, and there are transcripts of those that we can make available, if required.
Michael Fallon
It is the one missing piece of this whole story. Had we got a pay deal on time, from 1 April last year, and had a settled industrial relations climate, it is wholly possible we could have achieved a higher price at the sale.
Nadhim Zahawi
We have covered one of the risks, which was the industrial relations element. I just wanted to cover a couple more things. One is obviously at the time the US fiscal position was an uncertainty. Of course, if the IPO had taken place and the price had fallen back, that would lock the business out of raising more money in the market. I wonder whether the advisers can also advise on what would have happened if the Minister had decided to pull the IPO. What were the costs associated with pulling the IPO at such a late stage?
Vince Cable
Is that directed at us or the advisers?
Nadhim Zahawi
The last point was to the advisers. The first element was really to you, Secretary of State, and Minister Fallon.
Vince Cable
The obvious risk was of the United States and the potential meltdown in their fiscal position. We are now in a UK economy that is recovering; there is a fairly ebullient mood. If we look back to when the launch took place, there were massive uncertainties around the world economy. There still are. They centred on the United States, but the overall environment in which this took place was not a comfortable one. The US position was particularly extreme. I do not know whether our advisers can add to the significance of that.
Chair
We would accept there is some validity in all of those comments. However, what you do not say is that those uncertainties were still there at the time of the flotation and subsequently, as well as before. Given that the external parameters determining the level of uncertainty were pretty consistent but the price rose throughout that, there is an issue of how significant that was in the determination of the valuation and the subsequent sale.
Vince Cable
There were two particular factors that weighed very heavily. We have discussed them at some length: one was the industrial relations uncertainty, and the second was the point in the United States. Both of those have gone. This is a company, as Mr Fallon has just described, which in many ways is a fragile company. It is a recovery situation. This is not a blue‑chip company. We saw a few weeks ago that a very brief report from brokers about increased competition in the market caused the price to tumble. External circumstances could very easily change at any point in time and have a radical effect on the price.
Chair
Could I just say that I find quite bizarre the whole approach of the Ministers in terms of selling something? Whilst obviously when you are selling something you need to point out potential problems, there does not seem to be any emphasis on the positive cash position, the transformation in the company that had taken place, and the value of the assets that were implicit in it. I would reasonably expect anybody who was selling something to at least give a balanced approach. The approach of the Department seems to have dwelt upon the negative, which, if you are selling something, particularly when that something is a public asset that the public was entitled to get money for, seems quite frankly utterly ridiculous.
Vince Cable
Could I just comment? The prospectus, which was voluminous, sets out all the positive and all the negative factors around this share. The question you are putting to us is not about if we were going out promoting the virtues of the Royal Mail. You are asking us why it was that, at the point of sale, we were, in the words of the National Audit Office, “cautious”. We were cautious, as a Department, as ministers. That is the reason: because there were these major damning uncertainties hanging over the company. The risk of failure was high and the costs of a failure were potentially very damaging indeed. That is why we were cautious. We are not talking here about the sales promotion.
Chair
You were more cautious than the market, so you did not get the interpretation right.
Vince Cable
We do not accept that.
Mark Russell
If I can just come back on your point about pushing the positives, the key component of how this business was sold was the management team and their plan. That is what investors invest in. We had an unprecedented marketing campaign, stretching back nearly a year. If you go through that, you will see a very positive story was given. To say that there was not a positive story is absolutely wrong. There was a very positive story and, without that, we would have had no chance of getting the number of investors that we did.
Chair
If you had a positive marketing campaign, the fact that the shares sold very well would seem to indicate that. However, I find it even more bizarre that you should justify selling it below the level at which it realised. I want to bring in Nadhim now.
Nadhim Zahawi
Before I put my question to the Secretary of State, I asked the point about the cost of a pulled IPO, which you were going to comment on. Also, if the share price goes the other way, there is a cost for the 30% that the Government still holds, but also a cost to the company, which I think I mentioned, which would be locking them out of raising more money in the market. Am I right or wrong?
Mark Russell
That is absolutely right. Going back to the VFM assessment—the value-for-money assessment—the primary objective was still about getting private capital into the universal obligation and to protect that.
Chair
Thank you for that comment.
Mark Russell
It was vital that the company was in a position, should it need it, to be able to access the capital markets. One sure way that you will not access the capital markets is if you float and your share price drops right down. You are out of the market for some considerable time. The VFM assessment was not only about the price we got on the initial stake; it was also about the ability to sell on our residual stake and, thirdly, the ability of the company to access the capital markets should it so wish.
Nadhim Zahawi
Thank you for that. Secretary of State, you told the House that the advice you received, in terms of the final offer price, was “unambiguous” in that there was “no confidence that a sufficient number of buyers would offer a significantly higher price”. Indeed, some of the evidence that we took earlier on said, if there were, there would be 20p, if that, in it. However, the institutional offer—the book‑building—was 24 times over‑subscribed. What data or evidence do you have to demonstrate that all of that demand would have disappeared at a price over the £3.30?
Vince Cable
I would just repeat what we have said on several occasions. The very strong unequivocal advice we received was that, if we had attempted to push the price beyond £3.30, the upper end of the range, there was a very high possibility that a large number of the people who had hitherto expressed interest would simply walk away from the transaction. That was the advice we received and accepted, but I do not know whether Mr Rucker would like to explain why it is you do have this cliff‑edge problem.
William Rucker
Two things: it is important to remember we were selling 600 million shares. We were not selling a marginal number of shares, which affects the daily prices you see today, firstly. Secondly, when you look at the level of over‑subscription—
Nadhim Zahawi
What does it trade per day at the moment?
William Rucker
About £5.20 today. In terms of volumes, significantly less—a fraction of that number. If you take the level of over‑subscription, particularly in the institutional offer, you have to recognise that a lot of the institutions are trying to secure large orders. We had three orders in the book of around $1 billion each. None of those institutions expected to get it, so you have to, when you are looking at the book, not just judge it based on the pure maths, but actually make a judgment as to which institution is realistically expecting to get how much and at what price point they fall off the cliff. The cliff point was very clear from many of the investors who understood this company well. If the price was going to go significantly in excess of the range we were talking about, they would not invest in the company.
Chair
Can I just come in on that point? The syndicate that was in effect in a position to work with management and do extensive research came up with a different range of valuation than the Government did. I believe the syndicate research analysis valued the company at between £3 billion and £5.1 billion. These were not back‑of‑the‑envelope calculations; they were a result of in‑depth research done in conjunction with Royal Mail management. What weight did you put on those valuations?
Vince Cable
If we are talking about the same thing, there was a wide range of estimates by those syndicate banks, which we discussed in front of your Committee. I think it was the NAO that said we should disregard them as having no value.
Chair
No, it did not say that.
Vince Cable
Are we talking about something else?
Chair
No. The company syndicates that operated separately valued it at between £3 billion and £5.1 billion. Were you not aware of that?
Mark Russell
Could I just respond on that? You are talking about the syndicate equity research analysts. This is what they published on 12 September. You are absolutely right; the range was from £3 up to £5.10. You will see in the NAO report £4.50 to £5.10 is an outlier but, you are right; that is the full range. Those values, first of all, are one‑year target values. Secondly, they assume no IPO discount at all, so they are about the company’s shares trading in a year’s time. Most significantly, this research assumed a pay deal. If you take all that into account, where we set the price in the end, at £3.30, is well below the minimum of the values that were given, even with those factors.
Chair
You did not take their research into account.
Mark Russell
Absolutely, yes. Part of this was informing us and indeed part of this would have informed the institutions, which again were telling us the price they were prepared to pay for the stock.
Chair
Sorry, I am trying to get this clear: did you take their research into consideration?
Mark Russell
Indirectly, yes, we did.
Chair
Indirectly? What do you mean?
Mark Russell
The purpose of this research was to inform the institutions of how much they should buy the stock for. This was the purpose of this research. This is what institutions were relying on. When we finally set the price, much of that was dictated by the feedback we were getting from the market through our advisers as to what the institutions were prepared to pay.
Mr Binley
Mr Russell, I have been in business since I was 20 years old and I have been selling all that time. Never once have I gone back to a customer and said, “Look, I think this commodity is worth more. Will you pay more for it?” and they have told me, “Yes, we will pay more for it.” I do not know what world you are dealing in, but the world I deal in is that you have to make a judgment about your pricing. Feedback that you get from customers is not necessarily the best marker to set that price. Would you agree with that?
Mark Russell
Mr Binley, I have been in business for 30 years.
Mr Binley
Well, you have not learned what I have in my time.
Mark Russell
I completely subscribe to what you say. What you suggest is that there was no auction tension in the book‑building process, and there absolutely was. People initially gave their values, and the role of the book‑builder was to try to get those values up. Remember, we started with a book at about £2.50.
Mr Binley
Do you really believe that?
Mark Russell
Yes, I do.
Mr Binley
The evidence proves you totally wrong, and that concerns me immensely.
Mark Russell
The evidence we have is that, on a daily basis, we saw the orders people were prepared to put in at certain prices. I can tell you, in the initial stages of that book‑building process, the prices were well below £3.
Mr Binley
That is not the evidence that we have been given, quite frankly, and it is not the evidence that the Audit Office came to rely on as well. I just wonder why there is such a big difference with civil servants on this issue, who these good people need to rely on. I think you let these people down. Do you feel that that might be the case?
Mark Russell
No, not at all.
Mr Binley
Other people do. Carry on, Chairman.
Chair
It would appear that you disregarded the advice of research syndicates and took the advice of those who had a vested interest in buying and reselling these shares. You would reasonably expect a certain level of judgment to, in effect, be able to distinguish the relative significance of those two sources of advice and to have pitched that price in a way that provided more value for the taxpayer. Can I bring in Nadhim? Have you finished?
Vince Cable
Mr Chairman, can we answer that?
Mr Binley
We will come to it, Secretary of State, because I am going to ask some questions about it and you will have every opportunity to answer.
Chair
If you did want to come back on that specific issue, yes.
Michael Fallon
I think Mr Russell should be allowed to come back on that specific issue.
Mark Russell
Sorry, would you mind repeating that last point?
Vince Cable
It was the fact that we did not consider the—
Chair
What I am saying is that you had two sources of evidence: one from independent research analysts and another from bodies that were going to buy and sell the shares, and therefore had a vested interest in pitching their assessment at a low level. You appear to have weighted your response in favour of those who had a vested interest.
Mark Russell
Ultimately, and I said this to the Committee last time, this was an exercise in pricing, not in valuation. What was the best price that we could get for selling 600 million shares? All the time, we were keeping our eye on valuation and, in particular, what the comparable valuations were. At above £3 and certainly at £3.30, we were very comfortably above a number of the comparables. All the time we were looking at that. Yes, the book‑builders were doing the work on the ground, but the very purpose of the independent adviser was to test those figures. Of course, as you say, they could gain. Of course we are aware of that point. Of course we have to make sure that we are getting proper intelligence back. Remember, when the price was set, the price was set with reference to over 500 institutions globally. Were they all gaming us? Were they all in collusion? I think not.
Chair
I am not saying that they were. What I am saying is that you failed to give due weighting to the most independent source of professional advice on that, who presumably would have done the same sort of consultation processes that you engaged with yourselves.
Mark Russell
We were looking at independent valuations.
Chair
You are talking about process. The fact remains that, at the end of the day, you pitched the upper limit of the price at a level that was way down on the range of prices that were advocated or recommended as being appropriate by the independent research syndicate.
Mark Russell
The exercise was one of pricing, not valuation: what could we get for 600 million shares?
Chair
That goes without saying. You have not really explained why you took this particular level of pricing.
Vince Cable
It was explained that the prices that you are quoting were not the recommended sales prices. They were the target prices a year in advance. Mr Rucker was the independent adviser who oversaw this process. I think he ought to explain how they weighted the evidence from the different sources.
William Rucker
When the institutions were looking at what price they were prepared to pay for the business, in terms of the share price, they were looking at the prospectus, meetings with management and also independent research, which might be done by their own house but also might be done by independent houses, such as the ones you referred to. Given those prices were 12‑month targets and the required level of return the institution required in buying the stock, they could back‑solve to what they thought was an appropriate price to pay. This is what they do: they look at their required return and they will price it back to what they think it can realistically get to. If you look at the market today, nearly every public company will have independent research out there with target prices in excess of the current share price. That does not mean you can sell your shares at that target price; it means you can probably sell them at the share price. This is independent research, forward‑looking, and institutions take them into account, but it is not the basis for their entire decision.
Chair
You would reasonably expect a share price to reflect what a target price might be in the future, at least up to a point.
William Rucker
Analysts revise their targets quarterly. It depends on the success of the company. It is important to remember that this was a turnaround story and the volatility perceived by the institutions buying it was high. Therefore, the return they were going to require to invest in this was also going to be high. If the target price had been £3.30, in a year’s time we would not have been able to sell this at £3.30.
Chair
It would appear that the market completely judged it differently from how you have assessed it. Can I bring in Nadhim now?
Nadhim Zahawi
Just on the point you are making there, Mr Rucker, the National Audit Office stated that the book‑building process itself “effectively capped the price at the top of the range: there is no mechanism and only a limited incentive for bidders to reveal anything about demand at higher prices”. Given the NAO’s assessment of that, how did you come to a more detailed assessment of institutional appetite at a higher price?
William Rucker
There are certainly discussions all the time. It is also worth remembering that we had already moved the price up once anyway. When we went out initially pilot fishing to seek orders, we went out a price that was a range of £2.50 to £3.10. In association with the Shareholder Executive and the Treasury, we sat down and agreed, given the early strength of the book‑building, we would move that range up to £2.60 to £3.30. We had done that once. Why did we not move it up again? There was no evidence that there was enough demand in excess of £3.30, as we went through the book‑building process.
Mr Binley
Can I question you on that, Mr Rucker? I feel desperately sorry for the Secretary of State and for the Minister of State, because I think that both the civil servants and particularly the book‑builders let these good people down. All the evidence that came from those two sources was evidence of fear. That was the prime motive that you two groups of people were operating on. Let me put this point: Michael Fallon said that he had not any evidence that shares were undervalued on the day, a quote that you made earlier on in this particular set of questions. Yet when the Secretary of State went back to the book‑builders about price on Thursday 3 October, those shares were already 10 times over‑subscribed. On the next day when those discussions were still taking place, Friday 4 October, they were over 15 times over‑subscribed. Are you genuinely telling me that all of that over‑subscription would have fallen away if those shares had been priced at higher than £3.30? 15 times over‑subscribed according to the book on 4 October, and nobody would have paid more than £3.30 with that level of demand in the market. Are you really telling me that?
Michael Fallon
Absolutely.
Mr Binley
Do not advise my company, Mr Rucker. I find that remark amazing.
Michael Fallon
Can we just answer this, Mr Binley? Facebook was over‑subscribed 25 times. It fell 10% on the first day of trading. There is no link between over‑subscription and the actual price.
Mr Binley
In the marketplace there is no link? Mr Fallon, in a marketplace there is no link between the number of customers and the value of the price of the goods?
Michael Fallon
Why do you think Facebook then fell 10% on the first day?
Mr Binley
I have no idea about Facebook and we are not talking about Facebook. We are talking about this particular offer and, at the end of the day, all of the evidence suggests to me that you were motivated by a fear of failure. I understand that; I am happy with that viewpoint, but at least the general public needs to know that that is the motivation. By all accounts, the taxpayer lost between £1.1 billion and £1.2 billion. Whatever you say about supporting your argument, you were wrong. The very fact that it sold at the price it did and the way the shares moved thereafter prove that you were wrong. Are you going to admit that, so that at least the taxpayers can have some satisfaction in knowing that the advisers have learned a lesson?
William Rucker
I do not accept that we were wrong.
Mr Binley
I do not suppose you do. That saddens me.
William Rucker
Can I explain why?
Chair
Can I just come back to you, Mr Rucker? I will give you the opportunity to respond to Brian but, when we were talking about the syndicate research analysis, you implied that, in effect, it was their assessment of the value of the shares in a year’s time or some such time span. The NAO report actually quotes: “These valuations were key data points in establishing a pricing range as they incorporated the latest view on dividends, capital structure and property, and were informed by the lengthy interaction with Royal Mail’s management on the highlights of the company’s equity story.” That indicates to me that they were very much a snapshot of the company at the time of flotation.
William Rucker
Sorry, I said there were three important things that the company was effectively sold on. They were the prospectus, the independent research that you are referring to there and also meetings with the management. Many of the institutions that were buying the shares also have their in‑house research teams, so that is again a very important other factor. This is one of the factors people take into account. I am not saying it is not important.
Chair
It comes back to the relative weighting given to the independent research analysis and the banks that were involved in the book‑building process. Would you like to respond? I will give you the opportunity to respond to the points that Brian made, if you wish to.
William Rucker
I think Mr Binley’s point was whether we accept that we got this wrong—that we could have sold 600 million shares at a higher price.
Mr Binley
I will just make my point. Your argument is that the size of the marketplace and the size of the saleable object have no bearing on price. You were telling me that, if the price went above £3.30, most of that over‑subscription would fall away.
William Rucker
Correct.
Mr Binley
Who told you that?
William Rucker
The institutions themselves.
Mr Binley
Do you mean the book‑builders told you that?
William Rucker
The book‑builders and also direct conversations we had with the institutions, too.
Mr Binley
The book‑builders had a personal interest. Do you think it is wrong that the book‑builders and the offer organisers should be one and the same group of people? Would you in retrospect now look back on that and think that, at the very least, there was an opportunity for the owner of the shares, i.e. the taxpayer, to consider that a cabal could operate? Would you change it?
William Rucker
If we had been marketing this to a list of UK‑only institutions, whereby people fear that there is a UK cabal, if you go back 10‑20 years ago in terms of how you price IPOs, that risk exists. The real pricing tension came in this through the fact that we marketed this to over 500 institutions globally. You have seen today in some of the press the institutions are not UK‑only; they come from a range of institutions across the world. There are different types of institutions: hedge funds; we have retail; we have long‑only. We have a host of different types of investors. That provides the tension, by going wide and making sure we had different types of people, different types of investors and different geographies. That brought the price tension to the book.
Mr Binley
I understand that.
Chair
You ended up with 17 preferred bidders.
William Rucker
They were not preferred. They were investors that had been talking to the company way back in 2012. They had been having extensive conversations with the company. They were investors that the company and we believed, and colleagues on my right believed also, were investors that would be there to support the company through bad times and good.
Chair
I do not want to get bogged down in terminology, but it does seem to me that, if 17 were selected, elected or whatever to receive the majority of these shares, then the word “preferred” is a perfectly reasonable word to describe that.
Mr Binley
I want to go back, because I do want you to learn something from this. Every situation has lessons to it. You would agree to that, would you not? It is a very simplistic point of view. I do not understand why you were being so obstinate about saying, “We got it right,” when you palpably got it wrong.
William Rucker
I think you are saying we under‑priced this based on the fact that there was more demand than covering the shares one time. Let me finish, if I may. If you take that, you have to judge the amount of demand there genuinely was. As I said earlier, three institutions put in orders, hedge funds, of $1 billion. They had no expectation of receiving that and, indeed, it would be an interesting question if we had turned around and said, “Yes, you can have that.” Therefore, you have to judge the denominator and the numerator here. It is very dangerous to say that, because it was over‑subscribed, the share price was definitely going to go up. Facebook and many others have illustrated that that is not the case. It requires a judgment about it.
Mr Binley
You are a very knowledgeable man who knows the ins and outs of the workings of the City. Do you not understand that the taxpayer out there does not have that knowledge and there is a possibility that they could view this as being slightly less than absolutely squeaky clean? Do you recognise that reaction is a possibility?
William Rucker
What lessons do you learn?
Mr Binley
I asked you a question specifically: do you recognise that the taxpayer could judge it like that?
Chair
Let him answer, Brian.
William Rucker
If I could answer: given the circumstances around it, the turnaround nature of the business, the industrial relations and all of that, the likelihood that this share price was going to settle 10‑15% above the IPO price was probably low. It equally could have settled significantly below £3.30 if the unions had gone on strike that day and had struck for two weeks. The profits of the business would have been zero.
Mr Binley
If I had died yesterday, I would not be here asking you these questions. That is the way that life is.
William Rucker
Those were the circumstances at the time when the thing was priced, and it is important to remember that.
Mr Binley
You have let them down. Do not look at me like that.
Nadhim Zahawi
I will ask the question but, just before that, I am tempted to remind the panel that there was a recent IPO of AO World that went up by 33%. These things do happen with IPOs. They can go either way.
Michael Fallon
Where is it today?
William Rucker
It is now 15% below the issue price.
Nadhim Zahawi
Precisely.
Chair
But Royal Mail is not.
Nadhim Zahawi
On the final bit of my questioning on the National Audit Office report, they also highlight the fact that the demand for the retail bit of the offer was so high that it would have met the full 60% placing. How do you take this into account when assessing the share price?
William Rucker
Retail offers are typically relatively price‑insensitive. They are a price taker of the prices put out there. The risk is that the institutions that provide the fundamental liquidity in the stock market would not participate. If you had sold this entirely to retail, my expectation is liquidity would have come in through retail wanting to sell and the price consequences could have been very serious in terms of the share price falling. When you are doing an IPO, you are trying to create a balanced book whereby there is some liquidity but there is also some latent demand to come in and take up the pressure on selling. If you had a 100% retail offer, you might have been able to announce a higher price on day one, but I do not think those retail investors would have thanked you for the subsequent share price afterwards.
Nadhim Zahawi
You need the institution to pick up the overhang.
William Rucker
You need liquidity. You need people who are prepared to come into the market and buy the shares.
Mr Binley
My final question: can I ask what you have learned from this and what advice you might give to ensure that this situation, which most people see as unsatisfactory, does not happen again? What advice have you got?
Chair
I think that is a very good concluding question. It is fair to give you a chance to think about it, so we will park that until the conclusion of the inquiry.
Mr Binley
I am happy with that.
Vince Cable
I am happy to answer it, if that helps.
Chair
Let us just move on, but I do think it is a good summary question.
Paul Blomfield
Thanks, Chair. I wonder if I could move to another area. One of the reasons that the National Audit Office says that you failed to realise value for the taxpayer was the treatment of surplus assets. The NAO report highlights the UBS assessment of the surplus assets at a hidden value of up to £830 million. Your assessment was £200 million. How do you explain the disparity?
Vince Cable
I do not think the NAO did say that we had failed to realise value for the taxpayer. The calculation that I set out at the beginning is that we had actually made a significant net gain over the alternative, which was failure. That was the basic calculation at the heart of it. You had the question about the property assets.
Paul Blomfield
On that, Secretary of State, on page 6 of the NAO report, they do say, “We do not believe that the basis on which Royal Mail was sold recovered all of the value.” I suppose we can interpret that in different ways.
Vince Cable
I think we are arguing about the semantics of success and failure here. I think we would argue we were successful in our objectives. Are you specifically asking about the property portfolio?
Paul Blomfield
Yes.
Vince Cable
As I told the Select Committee before, the evidence was in the prospectus. It was based on an independent valuation by a reputable property valuer. People who had bought the shares were well aware of that valuation. There was nothing at all opaque about the process.
Paul Blomfield
There was, at the time of the sale, considerable speculation about the value of some of these assets, particularly the Nine Elms site. There was open press discussion of that site potentially being sold for between £500 million and £1 billion. In that context, would it not have been wiser to proceed along the lines of the NAO’s previous recommendations that surplus assets should be removed from the sale prior to the flotation and the Government could have realised for the public purse the value of them through a separate sale?
Mark Russell
That was looked at. I think you are talking about a potential sale and lease back. The main issue with that would have been that it would have almost certainly reopened the state aid settlement. As part of the state aid settlement, property had to be properly disposed of.
Paul Blomfield
Can I interrupt you? At the point at which the process had commenced, there would have been an opportunity to ring-fence the surplus assets and take them out of the sale, would there not? That would not have reopened the state aid negotiations, would it?
Mark Russell
No, because we would have had to remove the property at the current market value, which almost certainly would have been lower than the projected value that they were hoping to realise over a number of years. Remember, these properties are pretty immature. The disposable proceeds will go out many years, and our real concern was to ensure that the medium‑term disposal proceeds were picked up and reflected in the share price. If you look at those equity analysts’ cash flow forecasts, DCF forecasts, you will see that they attribute it at between £100 million and £240 million for immediate disposal proceeds of those properties. You must remember that quite a few of them are very underdeveloped. There is still planning permission to be got. Two of the sites are still operational.
Paul Blomfield
Thank you for that. I wonder if I could just return to the Secretary of State, because I am just looking at the NAO report again. Just for the record, page 17 does say, “We consider that the basis on which Royal Mail was sold could not fully recover the value of these sites.” That is on the record. Given that the explanation that Mr Russell has given for not taking the surplus assets out of the sale was that it would have delayed the process, and given that in your earlier comments to us today you said that postponement was something that you actively considered and, if that was necessary to achieve value for money, you would have proceeded with it, why then was the delay a problem if it would have achieved the value of the sites that the NAO has talked about?
Vince Cable
The only way that could have happened is if the site issue had been extracted from the process as a whole. Is that what you are saying should have happened?
Paul Blomfield
Yes.
Mark Russell
What the NAO suggests is that those values were not fully reflected. We would say we believe they were. It is difficult to prove it either way.
Paul Blomfield
Would not a better way of resolving the value have been to have taken them out of the process? If £200 million is seen to be a minimum valuation, take them out and sell them separately.
Mark Russell
There would have been a state aid issue about that, which would have delayed the process.
Paul Blomfield
The Secretary of State earlier said delay was not a factor; obtaining value for money was.
Mark Russell
There was another important issue, which was that part of us preparing this business for sale was for the company to commit or to indicate a dividend level. As you know, that was £200 million. That was not just offered up like that; we had to really work for that. I am fairly confident that, if we had stripped out the properties, given that it would have left the company without those future cash flows, it would have been very difficult to have secured that £200 million dividend. I think, from the board, we would have looking at a much lower dividend. The key thing is we believe that the £200 million—and the NAO has seen the valuation—was reflected in the equity analysts’ reports. They were attributing figures of upwards of £100 million, some as high as £240 million. When they say they do not think it was fully reflective, we would say we think it was.
Paul Blomfield
There clearly is a difference there, but I will leave my questions at that point.
Katy Clark
What were the reasons for not including a claw‑back provision for the sale of surplus assets?
Mark Russell
I am happy to deal with that. That was looked at and the advice that we received on this was that claw‑back mechanisms do not typically work. What happens is that, at the time of valuation, analysts and the market will look at the claw‑back that is likely to be realisable, and they will deduct that.
Chair
Could I ask you who gave you that advice?
Mark Russell
A combination of our financial advisers and our lawyers.
Chair
Could you give me the details?
Mark Russell
Yes.
Chair
I would appreciate that.
Katy Clark
Will you provide that in writing afterwards?
Chair
And also the advice.
Mark Russell
Yes.
Katy Clark
You will send us copies of that. What evidence was there to support that view?
Mark Russell
Sorry, a lot of that was oral advice. We were talking about property often and much of that was oral advice. To continue on claw‑back, claw‑back mechanisms have been used before, for instance in the electricity privatisation, where there were something like 6,000 sites.
Katy Clark
Did you look in detail at what had happened in that privatisation? Did you look at what had happened when it had been used before?
Mark Russell
We did look at that and there was very little claw‑back that came out of that. We could only find evidence of about £2 million claw‑back having been recovered.
Chair
Could you paraphrase the reasons why claw‑back did not work? Could you paraphrase the conclusions that were given to you by your advisers that claw‑back did not work—the reasons why it would not work?
Mark Russell
Primarily because we think it confuses or can potentially depress the equity value of the business, because people will associate or try to attach values to that claw‑back that might never actually materialise. They will deduct it straight away.
Katy Clark
That is a slightly different point from the point you were originally making. Could you maybe expand on the point that you were originally making and provide this Committee with the evidence? This is a massive issue. We have properties throughout the country in every constituency, and the impression that the taxpayer has is that they have been sold off on the cheap. Therefore, we need to know why; we need to learn lessons from this. Could you perhaps expand on that now or would you like to do that in writing?
Mark Russell
I am happy to do it in writing.
Katy Clark
What evidence will you be providing us with then? Will you be providing us with the evidence in terms of previous privatisations where claw‑back has been used and your view as to when it has worked and when it has not worked?
Mark Russell
Yes, we can show you that.
Katy Clark
What others have you got apart from the electricity one?
Mark Russell
We can write up the advice that we had from our lawyers and from our financial advisers when we discussed this. Not all of this is documented, but we can certainly tell you what we were told and why we came to that conclusion.
Chair
I would just like some sort of summary, because you have indicated, and I think I have understood it correctly, that a claw‑back could actually create confusion and uncertainty, and depress the amount that we offer. Is that a reasonable summary of what you say?
Mark Russell
Yes. I would say the other reason is that claw‑back arrangements are typically time‑limited. They are typically a 10‑year period, and what can happen is that the other part of the claw‑back arrangement, so in this case Royal Mail, will simply sit on the properties and not develop at all.
Chair
I will just follow up that, because I can understand what you say up to a point, but I cannot see any reason why you could not have put in a claw‑back provision that claws back any value over £200 million. Surely that would not have depressed the equity offer, because anybody buying it would be guaranteed the £200 million asset as outlined by the Government. It is only any additional value that would render them liable to some sort of claw‑back. I cannot see how that would confuse the offer price.
Mark Russell
Again, I will come back to you on this in detail, but I think the concern is that people will try to value or try to make estimates of what sorts of figures might ultimately come in above that £200 million. Again, remember these properties—Nine Elms for instance has a 13‑year period. They will make estimates and they could well discount the current figure with that extra claw‑back.
Katy Clark
Yes, but the situation we are in now is that it may well be that many of these properties are sold off with a significant excess, which will go to the shareholders. In many instances, obviously, the majority of it is in private hands. We as taxpayers have invested in those properties over many years, so this is an absolutely massive issue. We really need to know why that was not considered in more detail and have the evidence in relation to that. Do you accept the National Audit Office’s conclusion that you “did not fully recover the value of these sites”, because that was the conclusion that they came to? Do you accept that that is indeed the case?
Mark Russell
No, we do not think there is any evidence for that.
Katy Clark
You do not accept what the National Audit Office is saying.
Mark Russell
No.
Katy Clark
You are the custodians of a public asset. The impression that is being given is that, basically, you were not going to allow anything to stand in the way of selling off this asset as soon as possible. Anything that might cause a delay was something that was just going to be swept aside. Do you not accept that that is the public’s impression of what has happened?
Michael Fallon
Let me just try to correct that. This sale took place two years after Parliament approved the principle of injecting private capital into Royal Mail. It took place four years after the previous Labour Government tried to privatise Royal Mail. It took place five years after the initial Hooper report advocating a fresh capital structure. It took place 20 years after the previous Conservative Government tried to privatise Royal Mail.
Katy Clark
You were all desperate to privatise it.
Michael Fallon
The idea that we were in some kind of hurry does not stand up to any critical examination at all.
Katy Clark
Do you not accept that the taxpayer would expect you to wait until the right conditions were in place to get the best price?
Michael Fallon
We did wait.
Katy Clark
You think you did.
Michael Fallon
We did wait, absolutely.
Katy Clark
Do you think you got the best price you could have got?
Michael Fallon
We got the best price we could have got at that time. Hindsight is a wonderful thing. I am quite confident we got the best price we could at that particular time, bearing in mind all the circumstances at that particular time.
Chair
Minister, I find that assertion absolutely Alice in Wonderland. The fact is that you did not get the best price, because, on the day of sale, the share price soared. That is just an astonishing assertion.
Michael Fallon
No. That was on a small number of shares. There is no evidence that people would have paid more than 330 pence for 600 million shares, whatever they were prepared to pay for a handful of shares on the day.
Chair
You may not have had the evidence beforehand, but you certainly had it afterwards, which seems to imply that there was a certain, shall we say, lack of judgment.
Michael Fallon
Chairman, I have not seen any evidence that people were prepared to pay more than 330 pence a share before the sale. If you have that evidence, please show it to us.
Chair
I would be very happy to see the evidence that you had published that would indicate why companies would not pay at above that. Indeed, I believe that the NAO, in its research, has identified four that would have paid more than that. Can I bring in Mike Crockart now?
Mike Crockart
Thank you, Chair. I would just like to turn now to the relationship between the Government, the Shareholder Executive and independent advisers, and how the division of responsibilities actually arose. The NAO has looked extensively at this and it concluded that you delegated “a comprehensive range of responsibilities” and they list them: “a review of strategic options; arranging the selection process for the syndicate; capital structure advice” and a number of others. What roles and responsibilities were actually retained and did you and the Shareholder Executive exercise in the whole process?
Vince Cable
As you say, Mr Crockart, in the question there were different functions. Essentially we are talking about public procurement processes that took place in terms of the recruitment of the banks that worked on the IPO and also in respect of the choice of the independent adviser. They were conducted according to public procurement rules. Of course Ministers were not involved, but we approved the process. The involvement with the individual in the book‑building process was entirely devolved to the companies that had been selected through that process. The Shareholder Executive had oversight of this. We had the independent advisers and, in the final analysis, Ministers were required to approve and pass judgment on those decisions.
Mike Crockart
That does feel very much like you are saying that the only role and responsibility that you obtained was selecting the independent adviser to run the show.
Vince Cable
The independent adviser was selected through a Government procurement process. There were seven companies that applied to do the job that Mr Rucker has done. It has been described to me, because it was not a political process, as a series of objective tests of performance and ability. The Shareholder Executive acted also with the Treasury; it was a cross‑Government responsibility.
Michael Fallon
If I could just add to the process, as Ministers, we took the decisions. We took responsibility for the decisions. How this worked in practice was the Shareholder Executive reported to me weekly, from the previous autumn. We met virtually every week. All the major decisions were put to ministers, to me and the Secretary of State. We relied of course on advice, but there was ministerial oversight throughout the process and there was ministerial challenge throughout the process, from both me and the Secretary of State, particularly in the weeks and months leading up to the sale.
Mike Crockart
What I am trying to get to is effectively whose job it was to look after the taxpayers’ interests in the whole process. If we look at Lazard and what the NAO says about them, Lazard’s incentives were with the policy objective of achieving a successful sale. It was not about maximising the value; it was not about maximising the return to taxpayers. It was about making sure that the sale was successful. Whose job was it to ensure that the taxpayers’ interests were uppermost in that? Did that get lost somewhere along the way?
Vince Cable
It was central to their terms of reference. I will just repeat what I said right at the very beginning. When we had been talking about value for money and the return to the taxpayer, only one element of that was the price of the shares. The second was the retained value and the third was the potential loss of being left with a very severely depreciated asset. The value for money is those three different components. The financial adviser was well aware of that task. It was not a simple metric. It was judging, at all times—and we two Ministers had oversight of their decisions—to achieve value for money in that much more complex way than is in this endless argument about what the price was on the day. That was not, by any means, the only element in value for money.
Mike Crockart
I am not talking now about what the price was on the day. I think we have discussed that a lot. The NAO’s view is quite clear. They say, “The taxpayer interest was not clearly prioritised within the structure of the independent adviser’s role.” Do you accept that was a mistake? Should that have been more explicitly included within the independent adviser’s terms?
Vince Cable
In my fairly limited interaction with the financial adviser, I was under the impression that this was their central role and that was how they understood it. I do not know whether your perception was different.
William Rucker
No. What the NAO is saying is that we did not have any incentive fee; we had a flat fee is what the report says. The book‑runners all had incentive fees in there. I do not know if ShEx wants to comment on that, but I think there was plenty of incentive in the process. I do not think that at any point, I would hope colleagues on my right would agree, we were not incentivised to achieve the objectives set out.
Mike Crockart
The other thing that the NAO states and made recommendations about is a doubt about whether the Department was well enough equipped to challenge and interrogate recommendations made by independent advisers, and whether too much responsibility was given to independent advisers and left the Department. Do you agree with the recommendation that “departments should examine ways to reduce reliance on professional advisers for judgments affecting taxpayer value”?
Vince Cable
The Shareholder Executive is full of very highly skilled people who understand these things and have a background in financial markets, and we also had access to advice from the Treasury, so I do not think it was a lack of expertise inside Government.
Michael Fallon
The National Audit Office themselves say that the appointment of a multidisciplinary team of professional advisers was appropriate, given the scale and complexity of this transaction. That was their own contribution.
Mike Crockart
We can all quote selectively, but the quote I have given—that “Departments should examine ways to reduce reliance on professional advisers”—is a fairly straightforward and obvious one that the NAO is making. They seem to be saying that too much responsibility was placed outwith the Department, and perhaps some of that should be brought back into the Department to ensure that the taxpayer value is prioritised in the future. Would you not accept that?
Vince Cable
That is a judgment on the competence of our officials, and we have a high regard for them.
Mark Russell
There is a clear issue here as to what, either as Ministers or as officials, we can do in a process like this. The one thing that we cannot do, which is really important, is to speak to the investors directly ourselves. We cannot do that in a comprehensive way; we cannot go and speak to 500 investors. There are skills in a massive exercise like this that you have to use experts for. To try to pull some of that in-house would not be optimal at all.
Mike Crockart
I am not suggesting that. I am not suggesting that those negotiations are pulled in-house. What I am suggesting and what the NAO seems to be suggesting is that you need to have the skills to be able to challenge the advice that then emanates from those so that the recommendations are not just blindly accepted as being something that comes out of a black box that is too complicated for you to actually look at.
Mark Russell
That is a fair comment. All I can say is, on the crucial points of advice, we absolutely challenged. I have to say it was not just the Shareholder Executive and other members of the Business Department; it was Ministers as well, who were very engaged on the key decision points. It would be foolish for me to say no to that, but I would say that I think we have the right balance between internal challenge and external advice.
Mike Crockart
It is quite clear that the NAO does not agree.
Vince Cable
Can I just add one other thing? It goes back to Mr Binley’s comment earlier about squeaky cleanliness. It was absolutely crucial to the exercise that we were advised by people who had no vested interest whatever in the pricing process and were completely independent. That is why it was crucial.
Mike Crockart
The final thing is the NAO conclusion is that you did not receive the full value of the surplus assets—I know that you do not agree with that—and that the shares were worth “much more than this process was able to extract”. Again, you do not seem to agree with that. That would seem to suggest that, from the NAO’s evidence, we should be ruling out payment of any discretionary bonuses to the global co‑ordinators and the syndicate. If you are disagreeing with all of that evidence, you seem to be ruling in discretionary bonuses, because everything is rosy in the garden.
Vince Cable
We have not paid one and we have kept open the option.
Mike Crockart
You do not seem to be saying very much that would indicate that you are unhappy with the advice, the process or the end result.
Vince Cable
That is a fair summary. That does not relate to the decision on whether discretionary bonuses should be paid. On these three propositions, we would agree that we did get good advice.
Mr Bain
I think the public will be flabbergasted that Ministers are happy with the advice that has been tendered, given that they have forgone hundreds of millions of pounds as a result of this flawed transaction. Can I put to you the central finding that the NAO produced, which Mr Crockart referred to, which is that there were design flaws that meant that no one put the long‑term return to the taxpayer first? The primary driver for the Department was maximising proceeds for the Treasury. The primary requirement and criterion for the independent adviser was maximising proceeds for the Treasury. The whole problem is there was no one who was taking part in this process who was putting the long‑term taxpayer interest first. Is that not something that you would want to apologise for, Secretary of State?
Vince Cable
Absolutely not. Indeed, your question is full of loaded assumptions and false premises. The whole point about this exercise is that we were concerned with—I will use your phase—long‑term taxpayer value. That long‑term taxpayer value consists of three components. I have said this several times and I will repeat it. It is the actual cash that was realised at the time, where almost all your questioning is concerned; secondly, the residual value of the taxpayer stake; and thirdly, and absolutely crucially, the risk to the taxpayer had this transaction failed. They would have been left with a company under public ownership that had very limited value and was subject to very high risk. We were overwhelmingly concerned with, to use your phrase, the long‑term interests of the taxpayer. That is what drove the whole process.
Mr Bain
To take from that, your position would be no apologies, no regret, ‘Je ne regrette rien.’
Vince Cable
Absolutely no apology and a recognition—I think Mr Fallon used this phrase and it is a good one—that hindsight is a wonderful thing about price. Given the circumstances at the time and the facts that we had available to us, the correct decisions were made.
Michael Fallon
Two years ago, we had a loss‑making Royal Mail. Today, we have one of Britain’s top 100 companies with every prospect of a secure future and able to deliver on a sustainable basis the six‑day‑a‑week service that our constituents rely on. That is a success.
Chair
That was not obvious when you floated.
Michael Fallon
Nothing was certain when we floated. As I have said to you, half the issues in the last four years were below their offer price on the first day, and most of those are still below their offer price. There was nothing guaranteed about the success of this flotation at all.
Chair
I think we have been through this narrative, Minister.
Mr Binley
Minister, I am delighted that you floated in the successful way you did. Nobody is objecting to that. That was one of the three objectives. My concern, however, is the bad advice you received, resulting in the fact that you had the opportunity to squeeze a little more money out for the taxpayer, but did not. My concern now, because we are a scrutiny body, is that lessons should be learned in that respect. When you come to the final question, you might tell us what lessons you have learned, because there certainly are some.
Chair
Can we get back to William now?
Michael Fallon
Can I just answer that first?
Chair
No, you can answer it at the end.
Michael Fallon
He is making these statements and you are not allowing us to counter.
Chair
I understand that and I will give you the chance to respond to them.
Mr Bain
Thank you, Chair. We do ask the questions. If I can now turn to the issue of institutional investors, Secretary of State, you told the House that “between two-thirds and 70% of the shares held as a result of the IPO are held by long‑term institutional investors”. How many of these institutions were turned down as priority investors? Can you tell us?
Vince Cable
The phrase “priority investors” did not come from us. There were some investors who were heavily involved in the book‑building process and who took a significant share, a substantial share. There were roughly 19, of whom 11 are still significant investors and where 60% of the shares now are. There are different definitions about what these so‑called “priority investors” actually are, but it was of that order of magnitude.
Chair
It is a term used fairly widely in the NAO report.
Mr Bain
You would be able to tell the Committee who these institutional investors are.
Vince Cable
The issue of disclosure is this. My view is that we should be as open and transparent as possible, because there is a public interest here. The names of the institutions involved—as I said, there are fluctuating definitions—were given to the NAO. We have had legal advice that we should respect the commercial confidentiality of the parties involved, but I would recognise that you are asking perfectly legitimate questions and we want to respect Parliament. I am perfectly happy to pass, on a confidential basis, the names of the companies to the Chairman, because that is the practice that has been common in issues of this kind.
Chair
Can I just get it clear in my own mind? These are the priority investors that you are prepared to give the names of.
Vince Cable
Yes indeed.
Chair
Can you also give the names of those institutional investors that were turned down?
Vince Cable
I do not think anybody was turned down. People turned themselves down is a more accurate way of describing it.
Chair
Turned down as priority investors?
Vince Cable
I do not think anybody was turned down. That was not how the process worked. I do not know whether one of our officials can explain it.
William Rucker
The process was that the company started talking to 65 investors up to 18 months before the IPO. That then narrowed down, in terms of those investors who were interested in actually investing in the Royal Mail, to a shortlist of about 21. Of that 21, 16 actually invested. Others were not rejected; this was an early process in terms of pilot fishing and looking at potential demand very early on.
Chair
It seems odd to me that an institutional investor that would buy shares when they are put on the open market did not actually want to take part in the process prior to then. Is that the case? Were there many?
William Rucker
Sorry, perhaps I was not clear. 65 investors were spoken to at the outset, in terms of the company going out and seeing them. Of that 65, 21 showed an interest in becoming an investor in an IPO of the Royal Mail. Of that 21, 16 actually invested, some having fallen away because of price. I think you are asking whether those 65 all went back in and bought shares in the company afterwards. No, I do not have evidence, so I do not know because it is not disclosed, but I would suspect not.
Chair
What I am saying is: are there institutional investors with those shares now that bought them on the open market and did not wish to participate in buying those shares in the process beforehand?