Union opposition may make investors nervous as Royal Mail IPO is announced

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The Royal Mail’s express arm is set to win considerable financial independence, should the UK government’s announcement that it intends to partially privatise the organisation be realised.

A spokesman for the Department of Business, Innovation and Skills told The Loadstar that while funds raised from the proposed initial public offering (IPO) would be channelled to the Treasury, the move would give a partially privatised Royal Mail the freedom to raise funds for investment without recourse to the political process.

“Privatising Royal Mail would give it access to the capital markets to raise finance for its investment programmes, whether that is in trucks, facilities or staff; whereas at the moment it has to draw its funds from the Treasury, which means it is effectively competing with schools and hospitals for funds,” he said.

He confirmed that the government was intent on selling a majority stake in the business, which would include the 10% promised to Royal Mail’s 150,000-strong workforce. The government has stated that it wants to have the IPO, on the London Stock Exchange, completed by the end of the financial year next April, although the spokesman added that it could take place in a matter of weeks.

Royal Mail, which recently consolidated its letters, business-to-consumer and business-to-business divisions into UK Parcels, International and Letters (UKPIL) – effectively combining the Royal Mail and Parcelforce Worldwide brands – faces some significant strategic choices, whether the IPO completes or not.

Transport Intelligence’s head of consultancy, Joel Ray, told The Loadstar that such consolidation was increasingly typical at national post services.

“Business-to-business is in decline, but with the growth of e-commerce, business-to-consumer is not. It is growing, we estimate, by about 7% a year in the UK. This is where Royal Mail sees the future.”

But much will also depend on its relationship with the Post Office, which was split from Royal Mail last year and will remain a 100% state-owned entity. The UK government has promised that at least 11,500 Port Office branches will remain open.

Currently the Post Office acts as Royal Mail de facto e-commerce collection point, which gives Royal Mail a significant competitive advantage over rival express B2C operators which have had to develop alternative networks.

“The question is whether competition law will force the Post Office to open its services to other operators,” Mr Ray continued. “This would be good for the Post Office, because it would increase the traffic through its sites – but it would take away Royal Mail’s current competitive advantage.”

Another decision will be how to run a combined network, with Royal Mail’s letters operation typically working on a depot-to-depot basis, while Parcelforce Worldwide operates a hub-and-spoke system.

Another question is over the future of its fully owned continental European subsidiary, General Logistics System (GLS), headquartered in Germany and already run with a high degree of autonomy.

Finally, there is also considerable uncertainty over the effect of the reaction of the employees’ Communications Workers Union (CWU), which appears vehemently opposed to the IPO.

CWU deputy general secretary Dave Ward said: “Everyone knew the government’s intention to float Royal Mail this financial year, but we’re surprised they’ve chosen to start this process at the very time we are balloting our members for strike action. This could put investors off.

“We’re pressing ahead with our ballot of 125,000 postal workers and we will continue to fight privatisation and the potential impact of a sale on jobs, terms and conditions. The CWU is here for the long-haul. Any owner will have to deal with issues in the industry and take the workforce with them.

“Investors should take note of public opinion too – 70% of the public are against privatisation, according to the latest poll this weekend,” he added.

Ballot papers are due to go out to 125,000 Royal Mail and Parcelforce workers on 20 September, with the result to be announced on 3 October.