SAGAMITE: ABRACADABRA IN SALE OF PUBLIC ASSETS: QUEEN’S KINDGOM, EVEN YOU!
Sagamite is a bachelors graduate from one of the UK’s elite universities after an early life in Nigeria. He is an experienced management consultant that has worked with firms in a diverse range of industries both in public and private sector. His experience provides him with a catalogue of versatile and arcane knowledge. His current interests include logical structure of opinions/arguments, entrepreneurship and human psychology. He prides himself on his organic, objective and independent thinking, so the audience should expect a significant number of his articles to be contra-popular belief. He is one of Nigeria’s leading objective-Contrarian thinkers about life’s generally accepted conventional wisdom****
A news report in the UK got me seething with deep anger this past week. This was the story of the sale of Royal Mail through its floatation on the stock market. The UK Secretary of State for Business, Vince Cable, basically let the country be looted through his stupidity or even possibly his criminality. Who knows if there was a kickback that went to him or his close buddies made a killing?
I was so freaking angry every time I was reading or listening to the news report, I really need to let off some steam. This is the type of thing you expect to happen in places like Nigeria, not the UK. The report was that Royal Mail was floated (i.e. put on the stock exchange and is no more owned by the government) and privatised cheaply with the UK taxpayers losing roughly 20% of the true worth in value of the company, while the bankers and some investors got close to £525m for free in 24 hours. What da hell!
Basically, Mr Stupid Cable got advice from bankers at Goldman Sachs and UBS that the value of Royal Mail was 330p a share and he floated 70% of the government’s stake in the company at this rate while retaining 30%.
The other part of the advice was that the shares would not be sold to the general public but only to a select group of investors, with the logic that they will hold on to the shares for a long term and reduce any chance of short –term volatility in the share price. Now these same bankers that advised on the sale and did the valuation just happen to be the same ones who have close ties to these select investors.
Within 24 hours of floating (i.e. selling the shares to these select group investors) the shares that were valued at 330p a share was selling for 455p a share. That is 37% more than the valuation that Goldman Sachs and UBS put the shares, a loss of £750m instantly. Lo and behold, the same select group of investors that were the only ones allowed to buy the shares because they “will hold on to it for a long” were the ones selling it off under 24hours (yeah, a very long term), obviously with the help of their bankers who would get a commission (after the hefty fees they charged the government).
These bankers just happen to be Goldman Sachs and UBS in most cases of course. So, considering the government held on to 30% of the company, the investors and bankers made a cool £525m (i.e. 70% of £750m) in 24 hours! Today, roughly 6 months after, the shares are worth 70% more, selling at 549p per share.
So are we saying the self-proclaimed Masters of the Universe, who are so “talented” they need to be paid millions, are not good at the basic and most simple of tasks of their industry: i.e. valuation? That is like saying you have a professional footballer that deserves 300K a week but does not know how to control the ball well or a teacher that cannot read well in the language they use to teach and then being called a star.
I am not a professional finance guy by career line but I understand how valuation is done and can do a bit myself and know there is no way anyone that a professional can get such so wrong. Why? Because the Royal Mail’s valuation should be as simple as bread and butter based on its business environment and the competition it has (which is extremely low to the point it hardly exists).
Valuation is basically a process of understand the current worth (called present value) of something. This is usually done by finding out how much money the thing can make from now to perpetuity. It has some complex calculations that I will not bore the audience with but it really is not that complex to those that know maths.
Finding out how much money Royal Mail can make in future should not be that hard and should be a classic case for a Valuation 101 classroom teaching considering that it operates in a simple and static environment with hardly any competitors. Rather than the other extreme of a dynamic and complex environment like, let’s say, Sony does and who has many competitors.
Basically, it is far easier to forecast the future earnings of Royal Mail by conducting an historical analysis. In simple words, it is easy to know how much money Royal Mail can make in future and calculate the valuation to a reasonable range of error that is not as bad as 37% in 24 hours and 70% in 6 months for any finance guy worth his salt.
Now let’s look at the multiple errors Mr Cable made: – He undersold by 37% in the first 24 hours
– He did not put in place any binding agreement not with the selected investors not to sell shares for a period of time
– He did not ensure the bankers did not have conflict of interests
– Not putting in place punitive measures if the bankers got the valuation wrong by a certain % over a certain period Mr Cable defence now it that “the sale had achieved its primary objective of selling the shares and reducing the risk to taxpayers”.
Uhn!!! So it was not part of the objectives of a senior political office holder to ensure the government sells at an appropriate price or value for money from disposing off the public’s asset? This is a man that is supposedly an Economics graduate from Cambridge, who also has a PhD and is a former Chief Economist for Shell? http://en.wikipedia.org/wiki/Vince_Cable
Evidently, he has no degree in common sense. This man has to be FIRED! If I was in the fortunate position to be a journalist I would ask him a few simple questions: “If you have let us say 3 properties and you instructed your brother to help you sell one of them and he used an estate agent to it at £330K and within a week, you heard the same agent helped the buyer sell the same property to another buyer for £455K, would you say: 1) Your brother has done a good job and is competent? 2) You will use your brother again for such a sale?
If you do not answer yes or no, I will assume your answer is no. And if it is ‘No’ to both why are you still in your post?“ If you will not be happy to lose YOUR money like that, why should it be okay to lose the public’s money like that? If this can happen in the UK, only God knows what is happening when BPE in Nigeria is selling off the country’s assets.
No government representative should remain in his post if he oversees a sale of a government asset, in a static and simple environment, which appreciates by more than 15% in the first 2 weeks. That is just a complete failure of fiduciary responsibility.
What is the role of SEC in all these? Why should government allows her shares to be sold to a selected few investors? Why did the buyers shift the goal post as per the long term clause in the purchase agreement to a situation whereby shares were sold within 24 hours?
How profitable was Royal mail before it was sold? because this may affect the valuation of the company.
There are about 3 valuation methods used when buying a business, I guess the method in your article is the discounted cash flow method. The best thing is to use the average of all the valuation methods in determining the intrinsic value of a business.
Thanks for this article, it shows that they are not too different from Nigerian Investment Bankers.