Banker Defends £9.5bn Royal Mail Valuation

By Mark Kleinman, City Editor

The investment bank which proposed a near-£10bn valuation for Royal Mail defended its approach on Wednesday, saying it had not had access to inside information and had taken a bullish view of the company's prospects.

Appearing in front of the Business, Innovation and Skills (BIS) Select Committee, John Mayne, a managing director for UK client coverage at JP Morgan, said it had built in the prospect of a high dividend payout ratio into its projection for Royal Mail's valuation.

Mr Mayne said his employer had told ministers it believed the postal operator was worth between £6.8bn and £8.5bn excluding Royal Mail's debts. Including its roughly £1bn of borrowings, that range rises to £7.75bn to close to £10bn, as Sky News disclosed last month.

JP Morgan and other banks appearing before the committee failed to win roles on the deal, which has sparked a furious political debate about whether the UK taxpayer missed out on a windfall worth potentially billions of pounds.

Ben Story, the head of UK investment banking at Citi, another bank which pitched unsuccessfully to work for the Government, agreed with Mr Mayne, saying the US bank had not had sufficient access to information about Royal Mail to conduct proper due diligence before presenting its valuation range.

Two banks which did work on the privatisation also appeared before MPs, arguing that the taxpayer had not been deprived of significant revenues.

Richard Cormack, a senior executive at Goldman Sachs, said the price to which Royal Mail's shares have soared since the flotation was not reflective of the level at which the investment banks could have sold 60% of the company last month.

Adrian Bailey, chairman of the BIS Committee, said the banks had effectively allowed themselves to be misled by the institutional investors with which they had discussed Royal Mail before settling on the 330p-a-share sale price.

Earlier on Wednesday, analysts at banks connected to the privatisation published their first recommendations on Royal Mail shares following the end of a blackout period.

UBS, one of the lead bookrunners on last month's deal, urged clients to sell, placing a price target for Royal Mail of 450p, roughly 20% below the level at which the shares closed yesterday, but more than one-third higher than the 330p at which ministers agreed to privatise it.

"We believe management has executed well on improving productivity, with the UK margin rising to 4.3% in 2012-13 from -1.6% in 2009-10. We expect further improvements, due to productivity and revenue growth," the note said.

"However, with Royal Mail's share price up 69% since the IPO (versus 7-32% for peers), we believe the market is over-estimating margin upside. In particular, we believe it will be difficult to accelerate its transformation, given the limitations of the labour agreement.

"To get to the upper end of the 5-10% regulated range (assumed by the market; current 3%) would require acceleration of staff reductions, additional automation and no adverse events."

UBS said the stock market faced disappointment over the pace of automation in Royal Mail's parcels business.

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