By Mark Kleinman, City Editor
Taxpayers lost out on a lower sum from the privatisation of Royal Mail than the £1bn suggested by MPs earlier this year, a report commissioned by Vince Cable will conclude this week.
Sky News has learnt that an inquiry headed by Lord Myners, the former City Minister, will say that the Government could have received additional proceeds of between £120m and £180m if the sale of shares in the postal operator had been conducted more effectively.
His report will point to some inadequacies in the way that the Shareholder Executive, which manages state-owned assets, handled the privatisation, and say that based on initial demand from investors, the price range for the shares should have been revised upwards.
In his report to be published on Thursday, Lord Myners will also make a string of recommendations which could have far-reaching ramifications for City investors.
The Royal Mail sell-off in October last year triggered controversy when the shares soared by more than 35% on their first day of trading, prompting accusations that Mr Cable, the Business Secretary had grossly undervalued the company.
Earlier inquiries by the National Audit Office (NAO) and the Business, Innovation and Skills (BIS) select committee said taxpayers had lost out on up to £1bn when the Government sold 60% of Royal Mail to private sector investors, including sovereign wealth funds in Abu Dhabi and Singapore, and prominent hedge funds.
The process of allocating shares to those so-called priority investors following a process known in the City as pilot-fishing, which gauges appetite for a company's stock ahead of a flotation, is also expected to be criticised.
One insider said, however, that Lord Myners' report would say that he did "not believe that a price anywhere near the levels seen in the aftermarket could have been achieved at listing".
Sources said that it would also include data analysis pointing to unusual behaviour among the investors who bought Royal Mail's shares during its initial public offering (IPO).
Mr Cable commissioned Lord Myners to undertake the inquiry in July following the NAO and BIS Committee probes, and asked him to examine whether the structure of the sale process should be revised for future Government asset sales or in stock market IPOs more broadly.
The former City minister has been assessing the UK capital markets' use of a process known as book-building, which helps to establish the price at which a company's shares will be sold when it lists on the stock market.
In the case of Royal Mail, the bookbuild was contentious because the priority investors and other fund managers indicated that they would not be prepared to pay more than 330p, effectively forcing the Government and its advisers to set the price at that level.
A panel of prominent City figures, including a director of the body which manages taxpayers' stakes in bailed-out banks, was appointed to assist Lord Myners with the review.
Lord Myners is expected to broadly agree with Mr Cable that bookbuilding contains inherent limitations because of the difficulty of altering proposed price ranges once prospectuses have been issued, but will say that price ranges should be moved when share orders are clustered at the top or bottom of the existing range.
The panel is understood to refer in its report to a consensus view that ministers could have achieved a premium above the Royal Mail price range of 20p-30p, equating to up to £180m of additional proceeds for taxpayers.
However, it is said to add that revising the price range would have caused "material added uncertainty and risk".
The inquiry's wider recommendations are understood to include several measures to overhaul conventional market practices, such as: the earlier publication of prospectuses to facilitate greater investor education; enabling a broader pool of analysts to publish research on companies, as well as changing the approach to research blackout periods.
Lord Myners is also said to call for an examination of whether there should be standardised shareholding disclosure requirements for all institutions; discussing with equity index providers whether accelerated entrance to indices could be provided; and revising withdrawal right requirements, which enable investors to cancel 'buy' orders in certain circumstances..
The changes proposed by Lord Myners would require widespread market agreement between regulators and institutional investors.
The inquiry is also expected to encourage further debate about the involvement of retail investors in any future Government share sales, whether stakes should be sold in separate tranches, and more transparent auction processes for investors.
Some market commentators have questioned the value of the review commissioned by Mr Cable given the dearth of remaining state-owned assets which could be sold through an IPO process.
After their initial surge last year, Royal Mail shares are now trading at around 390p, valuing the company at roughly £3.9bn.
Royal Mail executives have become embroiled in a public spat with Ofcom, the industry regulator, about whether the company's ability to deliver its Universal Service Obligation is being jeopardised by the liberalisation of the end-to-end delivery market.
Lord Myners' panel is understood not to have recommended whether City advisers on the Royal Mail IPO, including the investment banks Goldman Sachs, should receive several million pounds of discretionary fees, with a formal decision said to be unlikely until after the General Election.
A BIS spokeswoman declined to comment, while Lord Myners could not be reached for comment.
