Royal Mail chief tilts for IPO

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Royal Mail's chairman is advising ministers to plan for a multi-billion pound stock market flotation in an options-open approach to privatisation that could take two or three years to come to fruition.

Donald Brydon told the Financial Times in an interview that the state-owned postal operator was entering a "new era", with better industrial relations and an opportunity finally to sort out its pension deficit, regulation and ownership.

He said Moya Greene , the Canada Post head due to start as chief executive next month, was a "startlingly good leader" who would "help with this sense of page-turning and a new future". Royal Mail is also looking for a new finance director after this week's resignation of Ian Duncan.

The Con-Lib coalition is drawing up a bill to open up Royal Mail to private capital, with the parliamentary arithmetic offering a better prospect of success after failed attempts over the past 20 years.

Mr Brydon is enthusiastic about the coalition's plan to offer a stake in Royal Mail to its employees as part of the privatisation and suggested this could be a double-figure percentage of the equity.

The government hopes to pass a bill by next summer but has yet to decide how much of Royal Mail to sell off or whether to opt for an initial public offering or a sale to a single buyer. The Post Office would be kept in public ownership.

An early sale could fail to maximise Royal Mail's value, given turbulent markets and a paucity of likely industry buyers. Judging by bids for a 30 per cent stake under Labour's abortive plan last year, its current total value may only be about £4bn.

"I would not start by shooting off to try to find trade buyers because that would mean you hadn't thought through properly the necessary framework and processes," said Mr Brydon, who took over from Allan Leighton last year.

"The one way to do this sensibly is to work on the assumption that you are going to do an IPO, because to do that you have to be able to answer every question you need to answer," he said. If good alternative buyers emerged, ministers would then have a benchmark against which to judge offers.

Mr Brydon added: "This is about defining the postal market for years to come and working through the right regulatory framework, the right economics for this business, the right balance between competitive access and making certain the last mile gets delivered."

Only then, he said, could the company be structured in the right way and private capital introduced. He was sceptical about a separate sale of Royal Mail's profitable GLS European parcels business.

Royal Mail's pension fund deficit will be revalued from £3.4bn to about £10bn at the end of this month, though the pensions regulator may allow time for a deal with the government to take it over rather than immediately raising company contributions.

Ministers must also decide on the future of Postcomm, the postal regulator, and whether to set out their own view of the market's future shape. Postcomm is consulting on changes to the pricing regime, but Mr Brydon said these might need further development.

"The regulatory framework, whilst encouraging competition, needs to be careful not to tear up the fabric of the underlying infrastructure by making it unfinanceable," he said.

Royal Mail faces increasing loss of business to e-mail. Mr Brydon said the drop in mail volumes had eased from 7 per cent last year to 4.5-5 per cent now, but was unlikely to return to the 3 per cent seen before the recession.

He said the company was working on long-term plans to improve its own digital business, including potentially replacing stamps with codes on envelopes and better ways of delivering online goods to customers.

Royal Mail has spent three-quarters of a £2bn investment plan aimed at transforming its operations and is "proceeding apace" with implementation after reaching a three-year pay and conditions deal with the Communication Workers' Union, following strikes last autumn.