In its scathing report into the UK government’s handling of the Royal Mail IPO last year, the National Audit Office is clear in its advice — look to Lloyds for how it really should be done. The report’s second recommendation in regard to the Royal Mail transaction reads “We expect good practice to be demonstrated when the government disposes of its remaining holding, for example as seen in its first sale of share in Lloyds Banking Group.”
But it's much too late. The cheap offer price in the Royal Mail IPO and subsequent performance of the deal has already limited the options ECM bankers will have for managing the rest of the sell-down like the much more cautiously handled Lloyds deals.
The NAO published a glowing report of the first sell-down of Lloyds shares late last year. The sale of 4.3bn shares in November, a transaction that raised proceeds of £3.2bn for the United Kingdom Financial Investments, was a prudent deal that offered good value to the seller, it claimed. Its assessment of last week’s block trade of another 7.8% stake in Lloyds for £4.2bn is likely to be equally positive, and so it’s unsurprising that the NAO highlights the government’s exit from Lloyds as a model to be followed.
But the government’s available options for how to dispose of its remaining holdings in the two firms are now vastly different.
For the Lloyds shares, every measure has been taken to ensure the successful complete exit from the name. In last week’s transaction, bankers were well aware of the importance of readying the ground for the next sell-down, and did not push pricing as much as they could have done, to ensure aftermarket performance.
This approach seems to have worked — while the shares closed slightly below the offer price on the day after the deal, they later traded up and were seen at 75.98p the following week — and this slow and steady performance may serve to keep investors’ attention primed.
However, Royal Mail’s surging performance in the five months since the IPO mean that investors view the stock in a very different light. The company's shares have risen from an offer price of 330p to trade at 566p on Tuesday, although they are down from the peaks of 618p seen earlier in the year. While this performance means that any investors that participated in the IPO may have done very well in the deal - The Independent reported today that anchor investors made £323m before cashing out - it may leave them more sceptical about future sell-downs. After the initial deal went, they may now believe there is no longer any value to be found in the name.
While the NAO may be right to criticise the UK government's approach to its Royal Mail flotation — and to praise the disposal of its Lloyds stake — its recommendation for a copy and paste transaction process can never work.