CVC May Deliver Fresh Royal Mail Offer

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CVC Capital Partners, the private equity group, will contemplate reviving its interest in Royal Mail as part of the Government’s plans to inject private sector money into the company, I am told.

People close to CVC say that the buyout firm, which owns Formula 1 motor racing and a chunk of the AA, is likely to look seriously at proposals drawn up by the Lib-Con coalition. The detailed agreement unveiled by the Government today said the following:

“We will seek to ensure an injection of private capital into Royal Mail, including opportunities for employee ownership. We will retain Post Office Ltd in public ownership.”

The intention to sell a chunk of Royal Mail to the private sector and to its employees was an aspiration of the last Government. CVC, which has experience of owning postal services operators in other parts of Europe, was the leading player in the previous auction, which was run under the aegis of Lord Mandelson, the former Business Secretary, until it was brought to an abrupt halt last summer.

The reason for the abandonment of that auction was given at the time as “difficult market conditions”. Unsurprisingly, given that Lord Mandelson was involved, there was another explanation, too: the political impossibility of forcing the legislation past intransigent Labour backbenchers.

Now, of course, the parliamentary dynamics have been turned on their head, and with Conservative and Liberal Democrat support, such a move is expected to encounter less opposition.

Still, many hurdles remain to a sale. There’s the disclosure of Royal Mail’s pension deficit, for example, which is next month expected to reach about £11bn. A plan to tackle that will be central to the valuation of the company.

The early indications are that the Government is likely to seek to sell up to 49 per cent of Royal Mail, as against about a third of the company under Labour’s plans.

Annual results announced by the company today demonstrated that CVC or any other potential buyer will need to be ready to write a larger cheque than they were a year ago. Operating profit at Royal Mail increased by £83m to £404m in the last financial year, and that was despite the strike action by postal workers that plagued the company last autumn.

Under Donald Brydon, Royal Mail’s chairman, and Adam Crozier, the man who recently left to revive ITV, there are more reasons to be optimistic about the future of the company than seemed likely a year ago. Crucially, a new modernisation plan is in place and has been approved by the unions. And, not incidentally, today's semi-clarification of the Government's plans means Royal Mail can get on with appointing a new chief executive.

Whether all that will produce a queue of bidders is questionable, however. Revenue declined across Royal Mail last year for the first time in a decade, underlining the structural challenges that it faces. Ministers may find that an offer from private equity, which might be politically difficult to accept, represents the best value for taxpayers