In the past week, the Treasury quietly let slip that the sale of Lloyds Banking Group’s shares to retail investors will be pushed back from this spring to this autumn, although a sale of shares to institutional investors is imminent.
And, according to The Wall Street Journal, the investment banks hired to manage the deal won’t be allowed to charge the Treasury any fees, or charge commissions to the investors they sell shares to. Instead, the banks will be working mainly for ‘prestige’– the bragging rights they can use to try to win future deals elsewhere.
For perhaps the first time, a UK privatisation is being set up to provide decent value to the UK taxpayer.
The fiasco of last year’s giveaway privatisation of Royal Mail is the catalyst for both the delay and the hardball tactics towards the City. Royal Mail’s shares rose 38% on the first day of trading (the average first-day gain for all UK IPOs since 2008 is just 4%). Today its shares stand a massive 80% above their offer price – equating to a £2.6bn gift from the British taxpayer to the hedge funds and foreign governments on Royal Mail’s shareholder list.
Recently, it was revealed that several of the investment banks who originally pitched to manage Royal Mail’s IPO had estimated the company’s value at up to £1.5bn more than the flotation price. Small wonder that shadow business secretary Chuka Umunna calls Royal Mail “a botched privatisation”. But in reality, most UK privatisations were ‘botched’ in this sense.
Think back to the big privatisations of the last thirty years. The first tranche of British Telecom was up a third on its first day of trading; British Airways was up 35%; Rolls-Royce was up 36%; and the 26 water and electricity privatisations which took place between December 1989 and June 1991 were up a staggering 42% on average. And the UK experience is not unique – privatisations in France, Spain and Turkey have historically been just as underpriced as ours.
Why do we keep getting this so wrong? Royal Mail’s valuation range was, according to its underwriters, depressed in part by the fact that its workers’ union, the Communications Workers Union (CWU), had announced a strike ballot on 2 September.
Equally, most state-owned companies have had histories of appalling employee relations, which spilled over into strike threats when their privatisations were announced. In 1971, a Post Office strike halted UK postal deliveries for a full seven weeks; and in 1984, one of the CWU’s ancestors, the BTUC, campaigned against British Telecom’s privatisation, distributing leaflets shouting “Hands Off Our Telephones!”.
And, as before, Royal Mail’s privatisation sought to include retail investors. An underlying political aim of privatisation has been to introduce individuals to share ownership: in 1979, only 7% of Britons owned equities, but by the end of Thatcher-era privatisation programme, this had increased to 24%.
It has been a successful, if very expensive, policy. Retail offerings are complex and lengthy, and political fears of the ramifications of smaller investors losing money in the weeks between pricing and the first day of trading may have affected Royal Mail’s pricing. But by selling Lloyds shares to institutions first and then waiting six months, the Treasury presumably hopes the valuation range will be well-established.
Despite all the faults surrounding its IPO, Royal Mail will almost certainly do vastly better as a private company than it ever did under government control – as will Lloyds. As one of Royal Mail’s largest investors, TCI’s Chris Hohn aptly puts it, “Governments are just about the worst owner of a company you could find. They mismanage them in every way possible. When those companies move from government ownership to privately-owned, these companies transform.”
This is true: privatisations have benefited all of us via increased labour productivity and efficiency, which have resulted in lower prices for consumers. And the proceeds of privatisation have helped reduce the UK’s public deficit (albeit by much less than if they had been keenly priced).
The UK has at most only a handful of future privatisations ahead of it – barring any future banking disasters, bailouts and re-privatisations, of course. Let’s hope the Lloyds deal can demonstrate that after 30 years, we have finally learned how do one properly.