The privatisation of Royal Mail (RMG) has got off to a bang with the shares hitting 459.16p in the first few minutes of trading, before settling back to around 449p. The initial public offering was last night priced at 330p, the top end of its indicative pricing range following a deluge of interest from retail and institutional investors. Today's trading has pushed up its valuation by just over a third so Royal Mail is now worth £4.5 billion.


The promise of a chunky dividend payment will certainly have attracted investor interest. Stirring the fires was also several analysts claiming the business was significantly undervalued.


Panmure Gordon said last week that it would initially value Royal Mail at between £3.7 billion and £4.5 billion, so it clearly made the correct call. Canaccord Genuity is understood to have published a note saying the government could have sold Royal Mail shares at 599p. We've not seen the research note yet, but we will endeavour to comment on City forecasts as we get hold of them. We wouldn't expect the research documents for a while as there tends to be a black-out period following IPOs where forecasts are restricted to institutional investors.


We looked at the Royal Mail investment case in detail in the 26 September issue of Shares. The crucial task for the delivery group is to cut costs. That's clearly going to mean job losses yet it has a fierce battle on its hands with the Communication Workers Union.


The business still needs significant investment and there's growing competition, particularly for parcel delivery. Royal Mail definitely has brand strength but the scale and competitiveness of its global rivals means the mail carrier may lack pricing power in the future.

Issue Date: 11 Oct 2013