The government will be able to sell Royal Mail shares at close to the top of its initial valuation because demand for the shares is strong.
The government priced the shares at between 260-330p, but with demand outstripping supply, it looks as if the shares will be sold for between 300-330p, increasing the amount raised for the Treasury and providing an easy opportunity to make a quick profit for investors.
As investors, economists and politicians take stock of the biggest sale of a national asset for more than a decade, more and more are coming to the conclusion that Royal Mail is undervalued.
There are a number of reasons for this. One is that the firm's colossal pension liabilities are being taken on by the government and do not form a liability of the newly privatised company.
Another factor that could have led to a higher valuation is that the firm is now trading profitably, making a profit of £400 million last year.
Labour's Chuka Umunna, shadow Business Secretary and a critic of the sale points out that the valuation does not appear to take account of more than £1 billion of property assets.
Finally, due to losses made in years gone by, Royal Mail has accumulated £2.8 billion of tax credits which means it is unlikely to have to pay any tax for 5-10 years, another reason for investors to smile.
The stimated opening share value is now above 400p, offering a chance to make an immediate 20 per cent profit.
Institutional investors are betting that the stock will begin trading at 403p and spread betting firms say there has been frantic activity to get hold of the shares before the deadline at midnight on Tuesday 8th October.
If the shares sell at the high end of the valuation, it would value Royal Mail at between £3bn and £3.3bn. There have been enough applications made to sell the shares two or three times over.
This has led to accusations that the taxpayer is getting a raw deal and the Royal Mail could have been priced higher.
Alan Johnson, a former Business Secretary and postman told the Daily Telegraph: “There is a vast difference between pricing Royal Mail shares conservatively and undervaluing them by £1 billion. This is ripping off the taxpayer on an epic scale.”
This means investors could be sitting on a 40 per cent profit after the first day's trading because analysts expect the shares to be valued at around 450p due to a late surge in demand.
The privatisation of Royal Mail is the biggest sell off of a national company since British Rail was sold off by the John Major government in the 1990's.
The anticipated increase in the value of the shares leave the government open to accusations of selling off the Royal Mail at too low a price and not giving the taxpayer value for money.
Supporters say it will give the postal service access to the funds it needs to invest and modernise and compete in the future.
The government is to sell off up to 62 per cent of Royal Mail, with current employees entitled to 10 per cent of the shares and the government keeping the rest.
Each of the 150,000 Royal Mail employees will be entitled to shares expected to be valued at around £2,200.
The government says it may sell a further 15 per cent of its stake if demand is very high.
The government admits that 70 per cent of shares sold will go to institutional investors and overseas investors.
Members of the Royal Mail union, the Communication Workers Union are being balloted on whether to strike over the plans for privatisation. The ballot closes on October 16th and the earliest a strike could take place would be a week later on October 23rd. By that time the shares will have been sold.
The deadline to apply for shares online is October 8th and they will begin trading in full a week later.
Members of the public can apply for the shares but the minimum investment is £750 or £500 for Royal Mail employees.
The IPO is being run by Goldman Sachs and UBS, with Barclays and Bank of America Merrill Lynch operating as joint bookmakers.
Individuals can apply for shares through participating brokers and online share dealing services, or directly online at www.gov.uk/royalmailshares.
Information packs on the share offer will be available in around 1,500 Post Office branches nationwide.
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