Royal Mail and the history of privatisations
The privatisation
of Royal Mail last week should present opportunities for private investors, as
well as employees and institutions. The chance to buy shares at a discount, the
scope for rapid growth following flotation and the injection of private capital
and incentives, all contribute to potentially profitable outcomes and the sell-off
of such a massive and socially critical institution – must not be held back
from the general public – as suggested by some commentators.
Options
for raising funds in the pipeline are the sale of its stake in; Royal Bank of
Scotland, Lloyds Banking Group, following the rescue packages undertaken during
the credit crunch. The Conservatives are in favour of crystallising value from
these banking holdings, with George Osborne suggesting that the government
could raise funds by selling its £70bn stake in RBS and Lloyds in the form of
discounted shares.
Sid’s history
In the 1980s, Margaret Thatcher’s Government successfully
developed the policy of selling nationalised industries into private ownership,
or privatisation as it became known. However back then the notion of selling
national assets to the public was largely untested and there was uncertainty
whether the public would support the issues. There were concerns that private
investors would not participate extensively in the offerings, leaving large
institutional investors to pick up the shares at heavily deflated prices.
Thankfully, this turned out not to be the case. In 1984, BT was
the first well known public sector company to be sold and private investors
welcomed the offer. More than two million people participated; keen to purchase
the discounted shares offered at a price of 130p.
The success of the government sell of BT paved the way for further
privatisations during the 80’s and early 90s, the majority of which were
floated successfully. The wave of sell offs then presented opportunities for investors;
the question is now, how profitable were these issues to the investors that
backed them?
We have calculated the returns of a cross section of the most well
known privatisations since floatation and compared them to the FTSE 100 over
the same period. In the large majority of cases returns were in excess of the
benchmark and in some cases out-performance was considerably more.
[Returns are calculated at 10th
July 2013 assuming a buy and hold strategy and are based on a capital
return basis, which excludes dividends. Holdings have been adjusted for
corporate actions and merger and takeover activity. The returns assume
shareholders held on to shares in demerged companies, and took all rights
issues in cash. Where a takeover has occurred, returns include the cash value
for the bid.]
This performance is impressive when you consider the renowned
underinvestment in assets prior to privatisation, and the higher levels of
staffing at the time of flotation. However, while not actually given away, they
were deeply discounted floats and when the companies were exposed to the full
force of competition; they certainly improved their performance, resulting in
very rapid growth from a low base.
In the majority of cases returns were good with significant
out-performance. Furthermore, many of the companies have an average dividend yield exceeding that of FTSE; therefore including income from dividends would have enhanced relative performance beyond that shown in the chart above.
A particularly
profitable privatisation was British Gas, which was memorably sold to “Sid” in
1986. An investment of £100 in British Gas would now be worth £1,246, an increase
of 1146% and that is not including any dividends.
Strong management
assisted in transforming British Gas into a global integrated Oil & Gas company
and investors have reaped the rewards. British Gas has had a series of
corporate restructurings; in 1997 Centrica was demerged, and in 2000 Lattice
was spun out and was later bought by National Grid. This has enabled investors
to benefit from the outperformance of two of the UK’s largest utilities,
Centrica and National Grid, which contributed to the staggering overall
returns.
Many of
the other privatised UK electricity, gas and water companies also performed well
and have since been taken over by larger European utilities, or infrastructure funds
resulting in investors receiving cash, usually on a premium valuation.
Investments
in Severn Trent, Powergen and National Power would all have outperformed the
market.
However,
a buy and hold strategy for the duration would not have worked on all stocks,
with the relative return from BT the most disappointing. An investment of £100
in BT at IPO would have been worth £113 at the end of 2011, although the shares
did rise to over £10 during the dot-com boom.
Investors
would have also underperformed the market had they participated in the British
Airways float. Poor relative performance would have been made worse by the
below market dividend yield. Why the underperformance? In contrast to British Gas,
British Airways faced stiff competition from the industry. The swath of low
budget airlines entering the market has restricted the potential for growth. Also
British Airways has been troubled by their historically high cost base, left
over from their state ownership days. Staff costs are still some of the highest
in the industry.
So the Royal Mail will not be a dead cert and
indeed we couldn’t even hazard a guess at its merits until we know the terms of
the offer – but private investors should be able to share in the opportunity to
put up their savings as risk capital for the development of the Royal Mail – if
they choose.
