FOR THOSE reading this post from outside of the UK, you may not be familiar with what exactly Royal Mail is. Royal Mail is the UK's state-owned postal and parcel delivery service. Well actually, not for much longer.
Last week, Business Secretary Vince Cable confirmed to Parliament that the government plan to privatise Royal Mail in an IPO worth £2-£3 billion. Royal Mail is set to float on the London Stock Exchange around March 2014, making this IPO one of the biggest of 2014 and also the biggest UK government privatisation since the sale of railways in the 1990s under John Major. This IPO will raise £1 billion for the country while post offices will not be part of the privatisation.
Plans to sell Royal Mail are nothing new. We may remember in 2011 that legislation was passed to privatise Royal Mail. Before that, there were failed attempts by Lord Mandelson in 2009 who put forward the idea of selling off 1/3 of Royal Mail and also the unsuccessful efforts of the Conservative Party in the 1990s.
Seven investment banks, led by Goldman Sachs and UBS are appointed by the government for this IPO, sharing fees of around £30 million or more . The other five houses - UBS, BAML, RBC, Nomura, Investec and Barclays - act as bookrunners. Lazard are advising the government.
A majority stake of Royal Mail will be sold but the government will hold a minority stake. This percentage of each will be dependent on market conditions and investor demand, of which I believe there will be ample of. 10% of shares will be granted to Royal Mail's 150,000 employees free of charge and provided that they hold them for at least 3 years. This move is made to weaken their support for trade unions and to placate workers. Or plausibly to placate voters by wanting to echo that "we're all in this together" - something the coalition parties' policies have not thus far reflected.
I am in favour of this privatisation. Why?
Firstly, it is quite noticeable from everyday life that the way we use (snail-)mail and the postal service has changed dramatically over the past few years. The internet, from providing paperless bills to online communication, has really decreased the volume of letters arriving on our doorsteps year by year. Coupled with a reduced appetite for mail due to sharp rises in stamp prices, the letter business is nor lucrative or popular for individuals and small businesses. But at the same time, while letters have declined, parcels and courier usage have increased quite sharply reflecting the prevalence of online shopping.
Secondly, you may live in an area where your mail isn't actually handled or even delivered by Royal Mail but in fact by one of several private companies like TNT Post or UK Mail following the opening of the market in 2006. Therefore like all businesses, if Royal Mail wants to be profitable, competitive and wants to continue remaining as a major player in the industry, it needs to innovate and it requires the investment to do so.
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| TNT among others: real competition... |
There has also been a rise of many courier players (from large conglomerates to 'lifestyle couriers') and this is the type of business that Royal Mail should start to make a mark on.
Given this changing environment, it is quite clear that Royal Mail requires adaptations and innovations. However, the capital to do so should not be granted by the government; cuts are still waiting to be made in several spending areas and public sector money could be better used for building and modernising Britain's infrastructure, preferably faster than the development of HS2. I 100% support that the private sector are better positioned to provide Royal Mail with the investment to re-vamp in order to be competitive.
While it can be argued that a further benefit of the privatisation is that approx. £1 billion will be raised, it is important to remember this is only an one-off gain. But the real benefit of privatising Royal Mail means the government will not need to invest large sums or seek additional borrowing to do so at a time of austerity.
This of course is big news for Britain but following the privatisation, I believe any changes will not happen immediately and there will be very little change, if any, to the way the service operates at the start. However, there could be a longer delivery period to make savings; it used to be before 9am that mail is delivered, now its around 12pm but the period could be extended to sometime in the afternoon. Or, mail could be delivered on alternate days.
- A target area for growth would be in the parcel area, fuelled by the volume of e-commerce in the UK. Future profits will come from parcel delivery and this area will be of key interest to investors.
- To compete with the explosion of 'lifestyle couriers', Royal Mail also needs to create a similar business unit and yet at the same time, not undermine or endanger the jobs of its 'real' employees.
- There are 150,000 employees within Royal Mail and its new owners may want to reduce this headcount if the way post is delivered is changed (since fewer staff will be needed). Staff reduction have occurred in other European mail privatisations - in Sweden, Germany, Finland and recently in Belgium for example.
Despite the fact that the Communication Workers Union - who represent the majority of Royal Mail employees - are threatening strikes, I think that with no announcement of plans to make redundancies and with the share option grant for all employees, this threat is really of little substance. Royal Mail's overall stability and a huge potential in the rise of profits among other long term growth mean that its shares will generate a keen interest from institutional investors. However, this will of course depend on valuations and some investors could see Royal Mail as too risky since it is prone to be hit by industrial actions (seeing as Royal Mail has been hit by such events throughout its history).
This IPO is one of the most exciting IPOs since Yelp for me so I will certainly be following it closely.
JH
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