Royal Mail leads the Government's great sell-off

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When the chief executive of Royal Mail first arrived in Britain to discuss taking on the new job she had one very simple request. Change the grotesque spider’s web of regulation which tied up the business (every price increase or product change had to be agreed with Postcomm) or she would be getting on the next plane back to Canada.

Luckily Moya Greene decided to stay. After three years of regulatory reform, internal modernisation and proper commercial management, Royal Mail is finally fit to take its place, rightfully, as a publicly listed company. Fortunately we have moved on from the time when Margaret Thatcher considered it too dangerous to “privatise” the Queen’s head.

Last week, the state-owned business revealed operating profits had leapt from £152m to £403m and revenues had risen 5pc to £9.15bn. Not bad for an operation that a decade ago everyone thought was heading for the great postal service in the skies.

Ms Greene admits that when she first arrived from a successful turnaround at Canada Post, the Royal Mail was in a “perilous state”, losing money in core markets and suffering the “worst regulatory approach of any country subject to the European Union postal directive”. Now she is in a position where major investment funds are happy to meet.

Speaking to me last week, Ms Greene revealed that she had discussed the possibility of taking a stake in Royal Mail with several long-only funds from abroad, naming one, the Ontario Teachers’ Pension Fund.

I understand that American funds, Calpers (the Californian Public Employees’ Retirement System) and Calstrs (the Californian State Teachers’ Retirement System) have also been approached.

Michael Fallon, the business minister who leaves colleagues in the shade when it comes to “getting things done”, is now considering what form any privatisation of Royal Mail should take. An IPO is his preferred option, a move which would not only give Royal Mail the correct level of public scrutiny but would also allow staff to receive 10pc of the shares available. They will probably be offered them at a discount or even for free, dependent on how generous Mr Fallon is feeling.

Ms Greene now has to prove she is able to improve margins. Last year, they stood at a skinny 0.5pc. This year they were a rather chubbier 3.5pc, a figure comparable with the publicly listed Deutsche Post.

“These are not commercial margins yet, but I can see we are on a trajectory that takes the universal service off life support and basically puts us in the ward to recover,” Ms Greene said. By October, the most likely month for an IPO, she will have more improvements to reveal.

What is interesting about Royal Mail is that the global trend that initially appeared an existential threat – a frightening digital world where “e-substitution” would surely see the decline and eventual end of chaps wheeling trolleys around full of things as quaint as letters and parcels – has actually revealed itself as the saviour.

As with retail’s realisation that online only really works if you have an offline offer as well (bricks as well as clicks), so Royal Mail has seen a huge boost from companies such as Amazon pumping millions of parcels into the system. Ms Greene revealed that 70pc of consumers would be more likely to order online if Royal Mail is the delivery partner.

Exposure to the distribution mechanism for digital adds real value to the bottom line. Operating profits at competitor UK Mail’s parcel division, for example, are up 41pc. Royal Mail is investing £75m over four years in its express parcels business.

Some investors have raised the issue of industrial relations, a subject that has bedevilled the history of both the Post Office, now hived off as a separate business, and Royal Mail. Ms Greene and the unions have built a reasonable relationship and it is to be hoped that the leaders of the CWU remember that state ownership (50,000 jobs lost over the past decade) has not exactly been a cake walk.
Privatisation will give Royal Mail access to capital, allowing developments and increased profitability that can only be dreamt of under government ownership. I do not believe Ms Greene will be returning to Canada any time soon.