Royal Mail undervalued, says Labour's Umunna

Labour says the business is "undervalued", but rules out renationalisation

The privatisation of Royal Mail undervalues the company by as much as a £1bn, with City investors and hedge funds being the biggest beneficiaries of the share offering, says shadow business secretary Chuka Umunna.

Speaking to BBC Radio 4's Today programme, Mr Umunna said that the sale is "short changing" taxpayers.

The government said it was following "normal commercial practice".

Members of the public can apply for the shares online until 8 October.

Shares will begin trading in full on 15 October.

Up to 62% of the business will be sold, with the rest remaining state-owned.

Under the terms of the share sale, a 10% stake in the business has been reserved for Royal Mail employees.

Strong demand

There is a £750 minimum amount for members of the public wishing to purchase Royal Mail shares, with the threshold falling to £500 for Royal Mail employees.

Mr Umunna said that the £750 minimum application was too high.

"That is a lot of money for most people - it is out of reach for many. Most of the people benefiting from this will be the speculators and the hedge funds".

The government may also sell an additional 15% of its stake in what is called an "over-allotment" option, if the demand for shares is very high.

Labour has already said that it would not renationalise Royal Mail after it is privatised.

In response to Mr Umunna's comments, the Department for Business said: "This is a commercial transaction and government is following normal commercial practice in setting and publicising the share price and delivering value for the taxpayer.

"The value of Royal Mail will depend on a number of factors, notably the company's on-going financial performance, its future prospects and the level of investor interest."

On Friday, it was reported that demand for shares was outstripping supply, and they were to be sold at the top end of the government's suggested price range.

Stockbroker Hargreaves Lansdown, one of the brokers through which investors can buy shares, said it would stay open until midnight on Tuesday to cope with the expected high demand.

Strike threat

Initially the government priced the shares at 260-330p, however, they are to be sold between 300-330p. Shares will begin trading in full on the London Stock Exchange on 15 October.

BBC business editor Robert Peston said applications for the shares were a "few times" the value of those on offer.

Members of the Communication Workers Union are currently being balloted on a potential strike over the planned privatisation, and other pay issues.

The strike vote closes on 16 October, and the earliest a strike could be held is seven days after that.

John Glen, senior lecturer in economics at the Cranfield School of Management, suggested that the government's guarantee that it would distribute a £130m profit to shareholders next July, meaning shareholders would get a 6.5% return on their shares, was driving demand.

"(It) is a good return given what you get if you put your money in the bank at the moment," he told BBC Breakfast.

However, he noted that the privatisation was controversial. "Over the last six years, we the taxpayers have spent about £2.75bn making the Royal Mail more profitable, we've taken on £8bn of pension liabilities ... and of course there's the issue about whether or not the Royal Mail will guarantee to deliver to us every day, across the whole country, at a single price."