Royal Mail: instructions in the post

[TrueBlueTerrier]

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Skilful politics required as a UK institution inches toward privatisation

The instructions are in the post. Well, not quite. But Royal Mail is inching towards privatisation, with the appointment of a bookbuilding syndicate of banks likely within weeks. Already the UK state-owned institution is sounding out investors informally. Business minister Michael Fallon reports interest from overseas buyers, although the official preference is for a float in which employees and private investors end up owing much of the business. Achieving that will require skilful politics. Customers worry that services will suffer in pursuit of profits, while the main union is hostile to ownership change. Still, Mr Fallon’s declared aim is to introduce external capital during 2013-14. Market conditions, at least, look helpful.

Ultimately, every business has its price. But certainly saleability has been improved, partly by divorcing the Post Office operations from Royal Mail (with contractual relations between the two) and transferring historic pension liabilities to the government. Also, while Royal Mail retains a universal service obligation, its new regulator has indicated that a 5-10 per cent margin, at the level of earnings before interest and tax, would be appropriate for these activities.

That said, the 3 per cent operating margin (for the six months to the end of September) looked very sad. Mail operations at Deutsche Post – also facing structural decline in letter volume and offsetting internet-driven growth in parcels – made 7.5 per cent in 2012. Royal Mail’s European parcel business, GLS, was more presentable, returning more than 6 per cent, but this is only 16 per cent of revenues. Part of the answer may lie in more automation: Deutsche Post’s annual capital expenditure in its mail unit has averaged €350m recently. Royal Mail’s capex was £150m in the past half-year, a run rate that should continue. Improvement potential can appeal. But price must also be right.

[clashcityrocker]

although the official preference is for a float in which employees and private investors end up owing much of the business.

Surely some mistake there?
Or maybe not..................

[DGP1]

although the official preference is for a float in which employees and private investors end up owing much of the business.

Surely some mistake there?
Or maybe not..................

Look at Man Utd, it was bought by taking a loan out by the club so the club owes the money that was used to buy it........not the people who actually get all the benefits, got to love modern economics