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How to Sell the Family Silver: Ignore the Banks

Now that a further round of public asset sales looms, the Government must ensure that it does not repeat the mistakes made in the privatisation of Royal Mail – where 25% of the value raised from the shares was lost due to underpricing.

In How to Sell the Family Silver, John Chown explains how the Government can fairly and efficiently sell the remaining bank shares – without losing millions of pounds in the process. (Ahead of the privatisation of Royal Mail in 2013, John Chown had warned that the Royal Mail would be undervalued if it listened to the sponsoring banks in No to Underwriting: How the Coalition can avoid being ripped off).

  • In the privatisation of Royal Mail, about £500 million was lost due to the Government’s decision to use a flawed, centrally planned, procedure – a Placing to priority applicants – as advised by the participating banks.
  • It is now clear that these priority applicants were either chosen poorly or with different criteria in mind.
  • Indeed seven of the 20 largest selected “priority applicants” sold all of their shares after the issue, and a further four sold most. The beneficiaries (about half) who sold their shares immediately made extraordinary profits at the expense of the taxpayer. Pension funds, and other genuine long-term investors who were overlooked in the allocation, were substantial buyers.

Rather than using a Placing, the Government should issue a Tender – this is where bids are invited that must be submitted within a deadline.

With a Tender, investors state how many shares they want, and the maximum price they are prepared to pay. All shares are then allocated at the striking price which would be the lowest price on which all the sales shares would go.

John Chown explains:

“Tenders are by far the most efficient and fairest procedure, and should be universal for large new issues, public or private – although for many years they have been virtually unknown. The Government should take the lead in setting a good example. 

Tenders represent, for the client, the best procedure for making a major new issue. However the procedure is opposed by the issuing houses, who would then have to make do with their disclosed and negotiated remuneration.

Many of the future government sales will be of companies which already have a listing and an established price. Selling a large block, though, cannot be achieved by simply offering shares to the market. The banks will, inevitably, lobby hard to repeat a version of their disastrous “book building”, “priority applicants” and “over-charging for underwriting” procedures. But on no account should the Government follow this advice. Instead they should use, and actively encourage the use of, the tender process.”

Click here to read the full report.

Image credit: Mark Elliott

John Chown - Monday 9th May 2016