ECM bankers are used to frank admonitions from clients when deals don’t go entirely to plan. But with privatisations returning to centre stage in the UK, they had better start getting used to public dressing downs, too.
In November, representatives of the banks that ran the UK government’s IPO of Royal Mail were brought in front of the Business, Innovation and Skills Select Committee to explain how the price achieved in the deal was so much lower than in the aftermarket.
MP Brian Binley thundered: “Do you feel disappointed that you have let the taxpayer down?”
Richard Cormack, co-head of EMEA ECM at Goldman Sachs, who was the target of the question, demurred. But the question, and its tone, highlighted the difficulties faced during privatisations of high profile institutions like the Royal Mail.
The level of scrutiny and the number of stakeholders on such deals is unparalleled, and means that the process will not always run smoothly.
After an uncontroversial sale of a stake in Lloyds Banking Group in September, the UK government then ran into trouble with the Royal Mail. But it will be 2014 when the success of the process will be judged.
“During any privatisation, the work bankers do must stand up to scrutiny in the court of public opinion,” says Craig Coben, head of ECM at Bank of America Merrill Lynch, which was a bookrunner with JP Morgan and UBS on the Lloyds sale.
The government’s holding in Lloyds was held by UK Financial Institutions and acquired, like the RBS stake that it still holds, during the financial crisis.
The time to sell down came in September. Lloyds had sorted out its balance sheet and profitability was returning while appetite for the stock as a play on the recovery in the UK was strong, with the shares up 61% over the year and plenty of momentum to sustain the deal.
The Lloyds sale was launched on September 16 and ran overnight. Everything about the deal was conservative, but forward facing.
It was a smaller size than many in the market had expected — just over £3bn, against predictions of as much as £6bn — but that, like every other part of the deal, had been calculated to ensure as smooth a delivery as possible.
The sale of 6% of the bank was priced at a 3.1% discount to the previous close, and hardly budged in the aftermarket. It set the tone for the government’s future sales — smooth, and with one eye on the future.
Another sale in Lloyds is likely to come after full year results, in the first quarter of 2014. It will probably feature a large retail component, on the instruction of the government.
Until then, Lloyds and the government will look to seize on the growing optimism for a recovery that has provided the impetus for its strong share price performance and earnings growth.
The lender has publicly signaled an improving appetite for growth into 2014, particularly in the small and medium size corporate market, and in mortgages.
Besides acting as a proxy for the UK recovery, big changes during the first half of 2013 to increase net interest margins, reduce non-performing loans, build its capital position and improve its provisioning should help push continued improvement ahead of another potential sale this year.
RBS demons to exorcise
However, the sale of the government’s roughly 80% holding in RBS will be a slower process.
RBS still has to exorcise the demons of its past — in November, for example, a report alleged that the bank had forced small business clients into trouble so that it could buy back assets cheaply.
Until the bank is brought back to health there will be little by way of dividends. But at the end of that process, the UK will have what is expected to be a stable, healthy bank, well positioned to lend in the UK.
When the UK government’s sale of its RBS stake does come — likely not until after 2015’s elections, but perhaps soon after that — it will probably run in much the same way as the Lloyds sale.
A giveaway to the UK public, one of the more radical suggestions for privatising the bank, would be unlikely to work given the administrative difficulties involved.
Instead, a succession of smaller selldowns is likely. The full stake will likely take many years to sell down.
Having the government as the largest shareholder will no doubt be a tough process for management and regulators. The UK might be more able to tolerate short term losses for long term gains, but the shareholding also makes RBS vulnerable to political whims.
Every time RBS is asked about who is making decisions for the bank, it reiterates that the board is in control.
However, the lender was initially resistant to selling the profitable, US-based Citizens Bank business. That then became a commitment to a partial IPO, then a full sale.
It seemed to be entirely driven by the politically difficult situation of the UK ultimately part-owning the largest regional bank in the US.
Citizens was a low risk, high return on equity business that will be well placed to take advantage of any potential rise in US interest rates. The sale, and using the proceeds to further strengthen the bank’s capital position, makes perfect sense for the UK government, but makes less sense for the bank itself.
The fear when launching the RBS sales or another Lloyds one, for the UKFI and its advisers, will be seeing a repeat of the Royal Mail’s reception. That deal was led by Goldman Sachs and UBS.
After listing at 330p on October 10, Royal Mail’s share price surged almost 38% on its first day. It was the highest first day return of any European IPO since 2007, according to Dealogic.
The claims that the deal had been mispriced began on the morning of the deal — and still haven’t stopped.
The smart things that the bookrunners did — including the tight allocations and the innovative retail application process — have been largely forgotten.
It has since reached a price over 60% higher than where the shares were sold in the IPO, though it began to settle down at around 550p at the end of November.
For now, those claims are the story of Royal Mail. But as with the Lloyds deal, bankers on Royal Mail may eventually be proven right in their desire to look beyond the present.
ManyUK IPOs in 2013 traded up 30% or more since listing— for stakes sold by highly experienced sellers, for the most part private equity firms. UK housebuilder Crest Nicholson, which was floated in February by a consortium of PE firms, is up over 60% since listing, for example.
However, many deals have fallen in the aftermarket — confirming bankers’ view that the success or failure of an IPO is often a binary event.
But the Royal Mail deal was an exercise of the same caution that had made the Lloyds deal such a success. The government still has a 30% holding in Royal Mail, and it may choose to sell it any time after April, when the lock-up from the IPO comes off.
The bank sales are likely to avoid much of that controversy, because as they were never fully nationalised, benefitted from a live reference price at the time of the first sale.
And the year ahead for Royal Mail — one of potential industrial action — could easily vindicate the IPO’s bankers.
To ensure the future brings positive judgement for those sales and the ones to follow, which could include the UK’s stakes in Eurostar and other assets, bankers must heed the lessons of the slick Lloyds sale and the Royal Mail furore.
Time may prove both syndicates right — because despite all of Binley’s bluster, 2014 and beyond will be the time that UK taxpayers find out whether they were let down by their bankers. |