The Shareholder Executive,UK Privatisation and the Management of SOEs

Paul Norris

17 March 2015

2

Areas Covered

• A Short History of UK Privatisation

• Overview of UK SOEs

• Role of the UK Shareholder Executive (ShEx)

• What makes a SOE Board effective?

• Recent Privatisation Case Study: Royal Mail

• Concluding Remarks

3

A Short History of UK Privatisation

PM Margaret Thatcher memoirs:

“Privatisation is at the centre of any programme of reclaiming territory for freedom… it is one of the central means of reversing the corrosive and corrupting effects of socialism”

Chief Secretary to the Treasury, Danny Alexander, March 2015:

“There’s no virtue in the government owning assets it doesn’t need to… which is why the UK Government targets the sale of commercial and financial assets worth £20 billion between 2014 and 2020”.

4

Overview Of UK SOEs • UK today has a limited number of SOEs

– Thatcher era privatisations in the 1980s and 1990s include telecoms, electricity, water, gas, airports, airlines, aerospace, oil, steel, railways

• UK does not have a unified, comprehensive approach

– Looks at SOEs on a case-by-case basis

– Common denominator of remaining portfolio = complexity

Shareholder Executive

Commercially Focused

SOEs

HM Treasury

Banks

Other Departments

All other SOEs

55

A brief history of ShEx

• Established in the Cabinet Office in September 2003

• Quasi-autonomous directorate within BIS, with significant involvement with HMT, Cabinet Office and other Government departments

• Current remit covers a portfolio of over 20 businesses spanning a number of departments across Whitehall

• Major provider of specialist corporate finance advice across Government

ShEx’s role in Government

• Ensuring that Government is an effective and intelligent shareholder in government owned businesses

• Managing Government’s interventions to secure best value for money for the taxpayer

Role of the UK Shareholder Executive

Specialist corporate finance ‘shared service’ across Whitehall

6

The Shareholder Executive’s SOE Portfolio

Business Innovations & Skills: Royal Mail, Post Office Ltd, UK Export Finance, Land Registry, Ordnance Survey, Met Office, Companies HouseHM Treasury: Royal MintDefence: UK Hydrographic Office, Defence Science and Technology Laboratories, Defence Support GroupInternational Development: Commonwealth Development CorporationTransport: National Air Traffic Services HoldingsHome Office: Forensic Science ServiceCulture: Channel 4Work & Pensions: Working LinksScottish Executive: Scottish WaterEnergy & Climate Change: Nuclear Decommissioning

Authority, Urenco, National Nuclear Laboratories, British Nuclear Fuels

Limited

77

Current ShEx Finance Projects

• ShEx provides corporate finance advice across Government departments

• Asset sales and introduction of private capital

SOE Portfolio Management SOE Options for Private Capital

• Challenge Departments and their businesses on efficiency, commercialisation and ownership

• General shareholder governance and performance monitoring

8

How SOE Boards Typically Operate in UK

Committees•Remuneration•Audit / Risk•Nomination•Other Ad hoc

GovernmentNED

NED

NEDCFO

CEO

NED

ChairpersonNED

Other?

9

What Makes SOE Boards Effective?

• Apply private sector best practice

• Government objectives set out– Ownership– Policy

• Importance of Chair

• Balanced board

• Other– Knowledge sharing across SOEs– Regular meetings/updates– Meeting of NEDs only

10

How Is SOE Board Remunerated?

• Structure

– NED vs Executive

• Executive remuneration

– Central Government controls

– Alignment to policy/commercial objectives

– Base pay, short term incentive, long term incentive

• NED remuneration

11

Royal Mail Privatisation Case Study

2010Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Hooper Review published

20 May: Coalition Agreement –

commitment to secure private capital into RM

PSA2011 receives Royal Assent – includes powers

to sell shares in RM

1 Apr: Post Office Ltd and RM formally

separated

1 Apr: RM pension deficit transferred

to HMG

27 March: New regulatory regime comes into force

2011Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2012Jan Feb Mar Apr May Jun

Postal Services Bill introduced

Preparation Phase 2010 – 2012

Pension solution• State Aid approval required• c. £28bn of assets• c.£40bn of liabilities • RM scheme left fully funded

Post Office / RM separation• sister companies under Government-owned Holding Company• 10 year inter-business agreement

Regulatory Reform• New Regulator (Ofcom) • Universal Service at heart of regulatory regime• Deregulation:

• removed price caps except on 2nd class stamps • c.5% revenue directly regulated

13

Royal Mail Financial Improvement

Cash Flows (£ Millions)

(476)

(86)

154

334

(400)

(504)

282

(390)

(246)

(493)(600)

(500)

(400)

(300)

(200)

(100)

0

100

200

300

400

2008-09 2009-10 2010-11 2011-12 2012-13

Cash Flow (before disposal of assets)

Total Free Cash Flow

14

The Sale of Shares 2012 to 2013

Investor Engagement• 12-month programme of engagement to educate investors on complex business • one of most comprehensive investor engagement processes in UK history

Timing

Purpose

Number of investors

65 35 21 548

Identify potential anchor investors and

gain feedback on potential deal

receive feedback about potential deal and messages around

industrial relations

secure indications of demand to give comfort

about deal execution

educate as wide a range of investors as

possible

Investor education

Nov 2012 - Mar 2013 May - Aug 2013 2-6 Sept 8 - 27 Sept

Early soundingsRefining the sales

messagePilot fishing

15

The Sale of Shares September / October 2013Book-building (27th Sept – 8th Oct)

Institutional demand:- 24 x oversubscribed at close

Retail demand:- accelerated in final two days - online applications offered last-minute flexibility

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500(£ Millions)

Value of shares in the retail offer(assuming institutional book reaches 330p)

Retail Demand (£ M)Shares Under Offer (£ M)

Retail Demand (£ M) 11 34 54 77 97 527 564 970 1023 1076 2075 3933

Shares Under Offer (£ M) 568 568 568 568 568 568 568 568 568 568 568 568

27th Sep 28th Sep 29th Sep 30th Sep 1st Oct 2nd Oct 3rd Oct 4th Oct 5th Oct 6th Oct 7th Oct 8th Oct

Coverage of offer at topend of the range(i.e., assuming institutionsbuy 43% of the company at 330p)

-

2

4

6

8

10

12

14

16

18

20

22

24 Hedge Fund

Long Only

Pilot Fishing

Hedge Fund - 2.50 2.50 4.10 4.80 6.00 8.00 9.30 10.60

Long Only - 0.90 1.50 1.90 2.40 3.30 4.90 5.80 9.60

Pilot Fishing 0.40 0.20 0.40 0.80 0.80 1.10 2.00 2.80 3.50

Pre-Deal Indications

Fri 27th Sep Mon 30th Sep Tues 1st Oct Wed 2nd Oct Thurs 3rd Oct Fri 4th Oct Mon 7th Oct Tue 8th Oct

Announced to market that

books covered

Decided not to extend range

Price range narrowed to

300-330

Price guided to 330

16

The Final Outcome – October 201310th October: 330p share price

60% sold, raising £2 billion for UK Exchequer290 institutions received sharesOver 690,000 retail investors received shares (only applications up to £10,000 received shares)Royal Mail formally classified to the private sector

11th October: start of conditional tradingRoyal Mail shares close at 455p up 38%

13th March 2015: Royal Mail shares trade c.430p

Institutional allocation

36%

64%

allocated shares

no allocation

Retail allocation

93%

7%

allocated shares

no allocation

17

Concluding Remarks

UK National Audit Office criteria for asset sales:

http://www.nao.org.uk/wp-content/uploads/2012/05/121320_app3.pdf

Thank You For Listening