11th Oct 2013 08:15
LONDON (Alliance News) - Royal Mail PLC shares opened sharply higher in conditional trading Friday, jumping by more than a third above its IPO price.
Shares in the 501-year-old institution opened up 36% at 450 pence per share in conditional trading open to institutional investors only. Trades conducted Friday won't be settled until unconditional trading, open to retail investors, begins on Tuesday.
An hour into trading, the shares now stand at 443.725 pence per share, up 34%, with a 102 million shares traded. In comparison, just 6.5 million shares of the normally heavily traded FTSE 100 blue-chip Vodafone Group PLC have changed hands.
The UK government confirmed late Thursday that it priced the Royal Mail shares at 330 pence per share, at the top end of its range, valuing the postal firm at GBP3.3 billion, after huge demand for the shares.
However, with the opening price at 450 pence per share, the current market capitalisation of the company is closer to GBP4.5 billion, making it almost certain to enter the FTSE 100 index at the next review in December. Excluding a 15% over-allotment of shares still being placed by UBS, the current amount of shares trading is 521.7 billion.
UBS has been granted the over-allotment of 78.3 million shares, or about 15% of the base offer, and has 30 days in which to trade them. Given the strong demand, that should happen quickly.
As it currently stands, the government owns 37.8% of Royal Mail, while retail and institutional investors will own 52.2%. Royal Mail's 150,000 or so employees own a 10% stake in the company.
The UK government said that it will drop its stake down to 30% if the over-allotment is taken in full.
With such a strong open for the Royal Mail shares, it is likely that the UK government will be in the firing line in political debates as to whether the shares were priced too cheaply, as a potential GBP1 billion has been left on the table.
Communication Workers Union closes voting in a strike ballot next Wednesday, a day after unconditional trading begins, on whether it will carry out a nationwide strike over privatisation, pay and pensions.
General Secretary of the CWU, Billy Hayes, told the BBC that the sell-off will not make a difference to employees' intention to vote for strike action next Wednesday.
"This is a sham, really. The company has been under-valued. It's basically David Cameron rewarding his mates in the City. Vince Cable, one of the cleverest men in British politics, has made one of the stupidest decisions he is ever likely to make as a politician," Hayes told the BBC.
CMC Markets Chief Market Analyst Michael Hewson told Alliance News that the current valuation is going to invite criticism as to whether the flotation was under-priced, but said the pricing of an IPO always is open to debate.
"It's difficult, because if the shares were priced too highly, it would of gone the other way. Obviously over the last few weeks, the IPO has generated a bandwagon of interest, and right now its order book is weighted heavily," he said.
"Based on profits from Royal Mail over the last few years, its difficult to say whether the shares really were priced too low or not, as it's in a very competitive market with strong competition from companies like TNT Express and FedEx," Hewson said.
The UK government's Department for Business, Innovation & Skills said that the institutional tranche on offer was more than 20 times oversubscribed, while the retail tranche for small investors was over-subscribed about seven times, with around 700,000 applicants.
As demand surged for the shares, the government made the decision that anyone who applied for the minimum GBP750 in shares, up to GBP10,000 in shares, will receive GBP750 in shares, while anyone who applied for more than GBP10,000 shares will receive none at all.
It said that around 270,00 applicants, accounting for around 37% of the total, will receive at least half of the shares they applied for.
The department also said that those who applied for up to GBP10,000 in shares will receive 227 shares, equivalent to GBP749.10 at the offer price.
With unconditional trading getting underway next Tuesday, Hewson said that it will be a couple of weeks at least before the real value of the company can be seen.
"We need some time to settle down, to see the real value here. From a dividend perspective, it is a solid play, but at the moment this price is very much driven by institutional investors. We need to wait until retail investors come in to play," Hewson told Alliance News.
By Rowena Harris-Doughty; rowenaharrisdoughty@alliancenews.com; @rharrisdoughty
Copyright 2013 Alliance News Limited. All Rights Reserved.
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