Would You Buy Shares In Royal Mail?

[TrueBlueTerrier]

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A flotation next year is looking the most likely privatisation option.

The Royal Mail has been a millstone around consecutive governments' necks, but there have been a number of obstacles to its privatisation, not the least of which was its massive pension liabilities.

But now that the European Union has given its blessing to the state's bailout of its pension fund, the transfer of its assets of £28bn and deficit of £9.5bn to the government, and the writing off of £1bn of debt, can go ahead. The path to a stock market listing is looking clear.

If it goes ahead, it will be one of the biggest flotations in recent years, with analysts predicting it could fetch between £3bn and £4bn. Previous privatisations, like the 1986 British Gas sell-off, attracted affectionate attention from the public at large, and hopes are high that the Royal Mail has a strong enough place in the nation's hearts to bring in legions of small buyers.
Regulatory relaxation

Many investors, however, are put off the idea of buying into a heavily regulated business, and the Royal Mail's universal service obligation could be a pretty big disincentive. The requirement to provide the same service for the same cost, regardless of whether a package is going to another street in the same town or from Tolpuddle to Aberdeen, makes profitable pricing a tad tricky.

But a significant part of that has now been swept away, as Ofcom has decided to remove regulatory control from the prices of first class post and from most business services. Second class stamps will be capped at no more than 55p, but that could be allowed to rise with inflation.

The Royal Mail has immediately responded by announcing a rise in the price of first class stamps from the present 46p to 60p from April 30, with second class going up from 36p to 50p.
The flotation

Although other options, including a sale to a private equity investor, are still on the table, the government is keen for a public offering to both institutional and private investors, coupled with a "Tell Sid" style marketing campaign. It is expected that at least 10% of the shares would be offered to Royal Mail employees.

Such a flotation will depend on next year's economic conditions, and on further improvement of the Royal Mail's financial state.

But does it look like an attractive prospect to buy into? Well, in recent years the Royal Mail has been beset by all manner of problems, ranging from the increasing loss of business to competitors and electronic communications, to difficulties modernising technology and working practices. But while good progress has been made, potential investors will want to see how finances go under the new lighter regulatory regime.

With the Post Office chain remaining in public hands, that will mainly depend on the Royal Mail's letters and parcels business, which in the six months to September 2011 lost £41m. But that was down from £55m, so at least it's moving in the right direction.
Caution is called for

Business mail services will surely be the key to future profitability. With email, text messages, and all manner of twittery things increasingly taking over from quill and parchment, the future of letter-writing looks bleak. And the new higher charges, while they might make the carrying of all those little envelopes more cost-effective, will surely help hasten its demise.

Are you likely to want to be a part of this new offering? It's an increasingly competitive business, and around half of the stuff I order on the Internet already comes from other shipping companies. And the bulk of my other mail consists of things like bank account and credit card statements, and those are increasingly offering paperless alternatives.

For me this planned sale is premature, and there will be political reasons for wanting it done during this parliament. But I'd really want to see a couple more years of financial improvement first before I'd consider stumping up any cash for a stake. I think it would be too much of a risk just a year from now.

If you see Sid, warn him.

[Straight4ward]

I'd swap some Colleague Shares for them.

[Carp]

Give me cash first from colleague share and i may think about it

[arnold cheshire]

so weve gone from being privatised in summer 2011 to 2013 will it ever happen?

[Alan F]

I think shares in the Titanic look more attractive.