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Institutions rush to buy into Royal Mail's 'stunning debut'

City investors are expecting a profit bonanza after the privatization of the U.K's postal service Royal Mail as investors scramble for the remaining shares ahead of its initial public offering (IPO) next week.

Tuesday is the final day for applications for shares in the mail delivery service, shares of which are priced at between £2.60p and £3.30p giving the service a market valuation of up to £3.3 billion ($5.3 billion).

The U.K. government is selling a stake of up to 52.2 percent in the operator, granting a 10 percent stake to Royal Mail workers and retaining the remaining stake in the near-500 year old institution whose selloff is not without controversy.

Retail investors can apply for £750 to £10,000 worth of shares using a debit card on the Government's website. The final price of shares and allocation will be announced on Friday, October 11 when the shares begin conditional trading.

Full trading begins next Tuesday, on October 15, in what Ishaq Siddiqi, market strategist at spread betting firm ETX Capital told CNBC Monday could be a "stunning-debut," adding that he expected the share price to soar above current valuations.

(Read more: Britain's Royal Mail to go private with IPO)

"This is certainly a very popular IPO, with positive press fuelling the demand together with a delay to the forthcoming industrial action which may now take place after the IPOs debut. ," said Siddiqi.

Although the government has said that the privatization is vital for the long-term survival of the service, which has seen revenues fall on the rise of electronic communications, it has been accused of selling off the service on the cheap.

(Read more: Twitter IPO: 'Grey market' indicates appetite high)

Giving some credence to the belief that the service had been undervalued, Siddiqi said ETX Capital's current spread for Royal Mail was currently £4.078 billion to £4.178 billion -- substantially higher than the government's valuation and up 15 percent since the company launched its "grey market" spread for the service in July.

A grey market is an over-the-counter system whereby a dealer executes orders for preferred customers before a company's shares are traded.

The opposition party in the U.K., Labour, has criticized the sale of one of Britain's last remaining state-owned institutions and postal worker unions are threatening to strike over pay, pensions and their future job security.

The government says the sale will give the service access to private capital it needs to modernize and compete. Despite the arguments over the sale and threats of industrial action, the IPO is expected to be oversubscribed, meaning that many investors will not receive the share allocation they have requested.

However, it looks as though the smaller retail investors may be the losers in the mail service's sell-off, with institutional investors like banks and hedge funds having "nabbed" the greater allocation of shares.

"As such, it would seem then that the institutional investors, rather than the retail, will get the lion's share of this IPO," Siddiqi said.

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt

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