Bottom Line: Prospectus is not enough to seal the deal

Elizabeth Fournier

FOR potential investors in Royal Mail, the next few weeks will provide plenty of time to get stuck into the lengthy prospectus for the float, and to try to decide whether the government has made an investment case worth taking a chance on.

Initially, their heads may be turned by the dividend. The government has promised an impressive £200m dividend on an annualised basis next year, giving the shares a yield of 6-7 per cent – above the market average.
Then, of course, they’ll turn to the financial projections. After years of losses at Royal Mail, chief executive Moya Greene swept in and has spent the past three years whipping the company into shape – last year operating profits skyrocketed to £403m from £102m in 2012. The nationalisation of pension liabilities also helped.
Margins are still lower than peers suggesting room to grow, and prospects are vastly improved by the inclusion in the offering of the group’s European parcels unit – a £1.5bn business that’s been consistently delivering despite the Eurozone slump.
But there are downsides. We still don’t know exactly how much will be sold off, market conditions are hardly stable, and the looming threat of industrial action will worry some investors.
Fallon has made the bull case. But shareholders and taxpayers will have to wait for the fine print to find out whether he’s right.
SOME of the biggest names in the City are involved in the Royal Mail float, with all parties agreeing to accept reduced fees in return for being associated with such a landmark privatisation.
Goldman Sachs is joint global co-ordinator and joint bookrunner, with a team led by Mark Sorrell – co-head of the bank’s UK investment banking business and winner of Dealmaker of the year at the 2012 City A.M. awards. He is working with Richard Cormack, recently made Goldman’s co-head of ECM and convertibles in EMEA.
Goldman shares top billing on the deal with UBS, whose team includes James Robertson and Christopher Smith. Joint bookrunner and sponsor is Barclays, where Mark Warham and Derek Shakespeare are working on the deal.
Oliver Holbourn and Justin Anstee of BofA Merrill Lynch are joint bookrunners, while William Rucker and Charlie Foreman of Lazard are advising the UK government.
Law firms Freshfields Bruckhaus Deringer, Linklaters and Slaughter and May have also lined up on the float, along with PR firm Citigate Dewe Citigate Dewe Rogerson.