Inside Track: City scrutiny of the Royal Mail flotation would be good

David Hellier
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AS the countdown to the £3bn sale of shares in the Royal Mail begins, the government and its advisers have made clear the importance they place on retail investors being part of the process.

There are several reasons the government thinks this would be a good thing, which is why it is creating a website specifically designed to make applying for shares in the entity easy.

Firstly, retail investors obviously add to the demand for the new shares, helping to boost the value of the stock and make sure it flies off the cybershelves. Secondly, privatisations help to educate investors who do not normally buy shares, encouraging them to get involved in the process and thereby support UK companies seeking to raise capital. STJ Advisors’ John St John wrote recently in this newspaper about how the involvement of private investors helps to invigorate an economy and has a positive impact on boosting growth companies, whist reducing volatility in share prices (because private investors tend to be longer-term holders).

Last year’s sell-off of part of RBS’s stake in the insurance group Direct Line provoked a mini-stampede of private investors and whetted the appetite of those who feel there’s a latent demand out there waiting to be tapped. One thing being discussed already, though, is how such investors will be educated as to whether they should buy shares in this issue and at what price.

In recent flotations, such as Direct Line or Partnership, there has been next to no research to guide investors as to whether to buy or not. This is because the banks in the syndicate are not allowed to publish their research publicly (it does go to institutions) and those outside the syndicate have either failed to get access to management ahead of the shares beginning to trade or have not thought it worth their while to publish research.

Banks, especially the big bulge brackets ones, often argue in favour of controlling the information going out ahead of a flotation, both for regulatory reasons and most often because they don’t want to have to deal with off-message analysis from an independent analyst who might have more negative views on a stock.

On this occasion, however, the banks would be well advised to listen to those who wish to widen the knowledge base so that private investors enjoy a lively, well-informed debate. There are seven banks working on the deal, which leaves at least 20 securities houses outside the tent.

Those that want to be part of the debate should be embraced as much as possible, even if some of them take a view that the Royal Mail and its advisers might not fully agree with.