The Royal Mail IPO Explained

By BethPH Last edited 63 months ago
The Royal Mail IPO Explained

post boxThe government's plans to privatise Royal Mail by way of a flotation on the London Stock Exchange (LSE) are due to go ahead on 15 October when the shares will start trading.

This basically means that if we have a spare £750, we could own a bit of Royal Mail. Arguably, as taxpayers, we already did, but that's a whole other debate. So how would we go about getting our own personal chunk of a 500-year old British institution?

What's an IPO?

An IPO is an Initial Public Offering. It's what happens when a company decides to sell shares in its ownership for the first time, thus becoming a public company rather than a private one. Facebook did it last year but it didn't go too well for them. In Royal Mail's case, a value of up to £3.30 per share was decided based on advice from investment banks UBS and Goldman Sachs. This makes Royal Mail  worth a cool £3.3 billion. The IPO has been tremendously popular and demand for shares has outstripped supply.

What will the government do with all that money?

New croquet mallets? A plethora of duck houses? No.The government wants to use the money raised to improve Royal Mail's services and make it more competitive, especially with the age of internet shopping creating a huge demand for 'While You Were Out' cards. They don't want to invest the money themselves so the alternative is privatisation.

10% of the shares made available are also being given to Royal Mail's 150,000 employees which means each will get shares worth about £2,200. Except for the 0.25% of staff who didn't accept their shares, that is. Considering that 96% of staff opposed the privatisation and 99.75% of staff accepted the shares, there's undoubtedly some analysis in there somewhere.

How do I buy shares?

Too late! The deadline for the public to buy the shares was 8 October. You could buy some on 15 October when it starts trading on the LSE, but the price may have have gone up. See our guide on share prices and the equity market for more details.

For those of you who did apply to buy shares, you may not get the full amount you requested (a bit like tickets for the Olympics) because, as we mentioned previously, more people wanted shares than there were shares available.

The only people allowed to buy and sell before Tuesday are institutional investors (banks, hedge funds, etc.) — this is called 'conditional trading' and allows shares to settle at the right level before official trading starts.

Why is the IPO so popular when 67% of the public oppose privatisation?

Well, Labour's shadow business secretary Chuka Umunna has said that Royal Mail has been undervalued by £1bn, so people think they're getting a bargain. And we all love a bargain. Spread-betting firm IG Index has predicted the closing price on Friday to be between £4.03 and £4.09. That's a profit of almost 25%.

Ironically, Labour's publicly-expressed concerns over the value have had the effect of increasing interest in the IPO. Business secretary Vince Cable was none too pleased about his opposite number's efforts:

"It is irresponsible to imply that a share offering looks significantly undervalued. I think you should consider the risk that you may be influencing the decisions of retail investors."

It goes without saying that the privatisation is also opposed by unions. The Communication Workers Union (CWU) argues that working conditions for its members as well as services could be harmed by privatising Royal Mail. Union members are currently being balloted on strike action, with voting due to end on 16 October, one day after trading opens, which could affect the share price.

Vince Cable is due to answer some questions from a Commons committee over the valuation today.

Does this mean my local post office will close?

Not necessarily. The government wants to invest in post office branches and, anyway, the Post Office isn't for sale because it's a separate company to Royal Mail.

For more information about the financial markets, see our handy guides:

Photo by Myles Davidson in the Londonist Flickr pool.

Last Updated 09 October 2013