Would You Buy Shares In Royal Mail?

Published in Investing on 27 March 2012

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.

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Comments

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wiblet 27 Mar 2012 , 6:30pm

Already invested in UK Mail, good balance sheet, pay dividends and growing nicely.

ANuvver 28 Mar 2012 , 10:52am

Institutional demand made BT and British Gas made those issues attractive propositions for stagging. I'm not sure Royal Mail will have the same dynamic.

BrnzDrgn 28 Mar 2012 , 1:08pm

Having heard what the Royal Mails managers are like I'm staying well away from this.

DCPlug 28 Mar 2012 , 1:27pm

Have to agree with BrnzDrgn -from personal experience last bastion of unionism ( except perhaps for Rail union) , appalling management living in the past and so bad that govt of all persuasions has spent the last 15 years trying to dump them. will be a mess from the get go...

simvik 28 Mar 2012 , 1:43pm

I think many people will stock up with stamps to use over the next 2 to 3 years with a near 50% increase it is not a bad return over this period, it begs the question will people sell them as a business making opportunity £1m stamps into £1.5m overnight if you got it right you could be made a stamp millionaire.
the next question revolves around accountability, how will the surge of sales be reflected with a delayed service, answer it will not so the next accounts will look like a fantastic turnaround and first full year as a listed PLC will be a right pigs ear.

wilsonjs 28 Mar 2012 , 2:31pm

huge turnover small profit i think the government will struggle to get this one away even without the pension shortfall

cduance 28 Mar 2012 , 4:12pm

The work force are often on strike and against modernisation because of the job losses 'modernisation' would cause. The unions dont like modernisation and I dont like unions so I am going to stay away personally.

GeorgeJHarney 28 Mar 2012 , 5:44pm

The bulk of local union disputes within RM have been do so with a bullying middle management culture - when you look at new technology the union has in fact been very good at trying to get agreements that will both protect its members (as every good union should) and better the service to the public - and in fact the union has often been in alliance with the public and local business alike when the service has been worsened (single late delivery, new ways of structuring rounds that don't work). Basic pay for posties is also pretty poor don't forget.

But surely the bigger picture here is that like the banks yet again this government seems to be obsessed with nationalising debt (in this case the pension defecit) but privitising profit - and as a taxpayer I find that both deeply offensive and in terms of the collective wealth and wellbeing of the nation (as opposed to a few large shareholders), and stupid in terms of basic government economics in the extreme.

snoekie 28 Mar 2012 , 6:00pm

Would I invest?

Not bl**dy likely.

They frequently try and use me as an unpaid postman when they misdeliver post and will not pay me for my efforts.

mercury104 28 Mar 2012 , 9:11pm

I am sure that, like myself most people find that an increasing proportion of the mail that they receive is advertising of one kind or another.
Now I am sure that the firms involved do not pay anything like the amounts we fork out but, presumably their rates will increase proportionately when the cost of stamps increase.
As there are now several effective alternative ways to canvass for business, I can foresee a further substantial drop in revenues
You just could not run a private business this way!
IMHO Royal Mail should have been privatised years ago. I am not a great supporter of privatisations ( British Rail --Irredeemable, unmitigated disaster ) but this ragbag outfit is crying out for it

Coggie2000 29 Mar 2012 , 3:39am

Personally, I don't see Royal Mail as much of an Investment opportunity.

Many households already have the where-with-all to copy, type, print, scan, *pdf allowing them to send and receive most of their own correspondence much cheaper and faster than Royal Mail.

This trend will continue.

millwall11 29 Mar 2012 , 12:09pm

A raging put option I would think. I've already bought £100 worth of stamps(Superdrug is a good place) and the office franking machine looks like getting a spank at Christmas too. Come to think of it sell Clinton cards as well.

LateDeveloper 30 Mar 2012 , 1:39pm

Typical Conservative Government selling off what they can in desperation, whilst still taking punitive measures against its populace.
Royal mail can only be saved if it is deregulated to such an extent as to make it competitive, whilst getting rid of some of the staff they already have in favour of someone that knows what they are doing.
If this were the case, I would certainly. buy share, but I won't hold my breath :)

ANuvver 30 Mar 2012 , 6:45pm

I've been a bit of a one-man anti-recession machine recently. Complete redecoration, savaging the garden, dozens of "got to get round to that" jobs, revamp of the wardrobe, etc. Most of the stuff I've needed - everything from thermocouple to goldfish - has been ordered online and delivered.

Only a handful of the deliveries have come via Royal Mail, and one of those was a "card through the door and leg it" job.

Oh, and I can well believe the recently touted story that the UK has the most flourishing internet shopping sector in the world. Of course, there's probably some personal bias in there, but a builder friend of mine doesn't even own a van anymore. Just takes a cab with his tools and uses Screwfix, Wickes, Jewson, etc to do his loading and driving for him.

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