Royal Mail IPO not just a privatisation opportunity

After a delay of several years, the British Government has announced it will sell a majority stake in Royal Mail Group through “flotation on the London stock exchange through an initial public offering” (IPO). It is unclear what the size of the ‘majority stake’ will be, however it will include a tranche of stock to be offered to employees of Royal Mail. The exact timing of the IPO is also unclear, however it seems that it will be before the end of this year.

Another aspect that is unclear regarding the IPO is the price that will be asked for the company. It is being speculated that the new Royal Mail Group PLC will be capitalised at around £3bn, a value based on its most recent profits, yet this number does not take into account the assets of the group nor its growth prospects. Bearing in- mind that Royal Mail has a very strong position in the e-commerce logistics market – a market estimated by the Government to be worth £75bn – its growth potential could be substantial.

The new semi-private Royal Mail Group will retain much of the employment terms for its employees. There will also remain a legal obligation to retain the universal service requirement.

In addition, it is important to note that the Royal Mail Group is different from the Post Office, which owns smaller postal facilities. The latter will remain owned by the state and may be transferred to some sort of mutual ownership.

Press reports of the ‘privatisation’ are attributing the British Government’s move to sell the Royal Mail to its wish to raise revenue. However, the need to decide on the strategic direction of the organisation has been latent for many years. The British Government had already commission a report – called the Cooper Report – which recommended privatisation five years ago.

The big picture is that the traditional mail market around the world is undergoing a transformation. The incumbent state owned mail organisations are designed for a different world and are faced with the need to fundamentally change their nature and direction, something that under the present state-owned dispensation they will find very hard to do. In such a context, Royal Mail might not be viewed as a burden to be dispensed with, rather as an opportunity to be grasped.