Can there be a float and strike at Royal Mail?

 
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The government's announcement of its intention to float Royal Mail on the stock exchange is not irreversible.

But it would take something of a market meltdown for the famous letters and parcels business not to become a company listed on the stock market in November - which would end a long and tortuous journey towards privatisation that began in 1992.

Royal Mail has given more detail about what it will look like in the private sector. It plans to pay a dividend to owners of £133m next July, and would have paid £200m if it had been listed for the whole of 2013/14 - which implies that the business is worth around £3bn.

And results just published for the first three months of the year confirm the trend of declining letter volumes and rising deliveries of parcels.

At least 41% of the shares will be sold, to individuals and investment funds, and perhaps more (depending on market appetite at the time of sale) - with an additional 10% given to 150,000 Royal Mail employees.

So almost all of Royal Mail's people (it employs 167,000 in total) will be endowed with about £2000 each of free shares, paying an annual dividend or income to them of around £133.

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There is a risk of shares being offered... at a time when industrial action brings the mail service to a standstill ”

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And Royal Mail staff will have first dibs over the public if they want to buy shares - and can subscribe for a minimum of £500 of stock, compared with a minimum purchase of £750 for everyone else.

But here is what is very unusual about this share sale. It is taking place at a time when the CWU union is balloting its 125,000 Royal Mail members on a strike, over pay, pension changes and post-privatisation terms and conditions of work.

As Royal Mail admits, there is a very real risk of its shares being offered for sale, including to postal workers, at a time when industrial action brings the mail service to a standstill.

I can certainly never remember any business being sold on the stock market at a time when it had been brought to a grinding halt by a strike. But that does not mean a flotation in those circumstances can't and won't happen.

There is the very real, or perhaps surreal, prospect, of postal workers simultaneously downing tools (parking their trolleys) and subscribing a few hundred quid for Royal Mail shares.

A couple of other things stand out for me in today's announcement.

First, that the business does appear to be on a trend of improving financial results. In the first three months of the current year, its operating profit margin (the ratio of profit to revenue) was 5%, compared with 4.4% last year and almost nothing the previous year.

And it is generating healthy amounts of cash - £110m for the first quarter of the year, which implies free cash flow will be more than £400m for the full year (which explains why it feels it can afford to pay out dividends of £200m).

What is also interesting is that it is refinancing all its debts. Or to put it another way, it will henceforth borrow from the private sector rather than from the government.

Funnily enough, this should save Royal Mail a fortune - because it is currently paying interest to the BIS department of 8.8% a year, and should be able to pay interest of less than 5% to banks and other private sector lenders.

Last year Royal Mail's interest costs were £82m on drawn borrowings of £973m. So privatisation should save it perhaps £40m of interest payments per annum to the government.

Of course there is another way of looking at this - which is that the government, taxpayers, will be £82m a year poorer.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    -44

    Comment number 20.

    I'm glad they're going to privatise Royal Mail. It'll stop those lazy workers striking all the time. The Germans or Dutch will probably do a better job anyway!

  • rate this
    -10

    Comment number 19.

    Post prices have risen enormously over the last couple of years - makes it more attractive I suppose..

    Really makes one wonder why the private sector works so much better.

  • rate this
    +9

    Comment number 18.

    Whilst Millband risks losing his party donations by upsetting the unions DC and Co are securing theirs by selling of Royal Mail to their mates in the City whilst the tax payer will undoubtedly pick up the toxic pension pot. I wonder if the timing is to enable them to capitalise on next year’s influx of cheap Romanian labour to boost profits.

  • rate this
    +34

    Comment number 17.

    Of course (for the average person) privatisation of - railways, utilities, prisons, etc has worked so well (not). Personally I will vote for a government that brings back nationalisation - only a matter of time until the law would be changed and rural deliveries will be once or twice a week to save the poor investors money!

  • rate this
    +82

    Comment number 16.

    This scheme is a FARCE and is a classic of example of how this dog of a Tory led Coalition Govt. say & do 2 different things...


    ...private profit will be generated for their friends in big business whilst we, the already hard pressed TAX PAYER, SUBSIDISE private PROFIT by paying for the new company's pension liabilities...


    ...this is a complete DISGRACE whichever way you look at it...

  • rate this
    +74

    Comment number 15.

    the gov claims the royal mail is old fashioned and antiquated, needs modernisation etc and hence the float for 3 BILLION! Why are they asking top dollar for a "fixer upper"? They have claimed it's losing money, then when it turned a profit that it wasn't making enough...but it's enough to hand back 130 MILLION to shareholders next year? How about don't privatise and spend this cash on improvements

  • rate this
    +3

    Comment number 14.

    Ah, Rest In Peace Royal Mail.
    You had a good run, but price manipulation, service cuts, and finally technology, has sealed thy doom.
    A sad day.

  • rate this
    +9

    Comment number 13.

    Strike and privatisation at the same time?

    I recall the last strike by Royal Mail in the 1970s led by Tom Jackson. After months on strike the workers had to return to work having won nothing.

    I wonder if this is a wicked plan by the Government to destroy the Communications Workers Union as Thatcher destroyed the NUM in 1984/5 and thereby making the the sale more attractive to investors.

  • rate this
    +25

    Comment number 12.

    Pursuing failed dogma at the expense of the general public is extremely sad to see... we will of course watch with interest to see which of the 'too big to fail but have repeatedly' banks get the huge commission as underwriters and book runners and which government ministers later go on to directorships at said banks.

    Privatisation, selling taxpayer possessions to the highest bidder. Epic fail.

  • rate this
    -1

    Comment number 11.

    Royal Mail and it's inextricably linked Post Office service have been the subject of much changed particularly by the previous Government who presided over a cull of rural offices and introduced competition by others none of whom have the ability to deliver to every household, up every lane and farm track in the UK.

    If it wasn't for so-called junk mail I think their days would be numbered.

  • rate this
    +27

    Comment number 10.

    One thing I will guarantee is that this will serve to increase the wealth of the privileged few. Paid for and by the majority of former "stakeholders", via an increased cost of services, justified by the private/profit nature of the new business.

  • rate this
    -35

    Comment number 9.

    There is no reason why the mail system should be a public monopoly. I welcome this privatisation. I hope in the following years the mail's monopoly position privileges will also be removed allowing new lean and efficient private mail companies to compete in all areas of letter and parcel delivery. I understand the unions reluctance to joining an environment where economic reality is paramount.

  • rate this
    +6

    Comment number 8.

    The choice is simple.

    They are selling something you already own, at a knockdown price.

    Either participate I.e. buy part of something you already own and get a share of the excess;

    Or don't participate, in which case you get ripped off twice.

    Ain't "democracy" wonderful ?;o)

  • rate this
    +2

    Comment number 7.

    The closing part is interesting. I wonder why Royal Mail was previously obliged to borrow from the government at 8.8% despite this being an uncompetitive rate. Was it a matter of a) private banks not wanting to lend to a public-sector entity; b) government rules preventing access to banks, or c) a choice by RM bosses to take more expensive govt finance over private sector lenders?

  • rate this
    +62

    Comment number 6.

    So the public don't want to sell it, the workers don't want it sold, it's making a profit and past privatisations of other services have been a disaster.

    So why on earth is it being sold?

  • rate this
    +2

    Comment number 5.

    #1 - You're right, Bauer. Privatisation has delivered the goods. The internet revolution could not possibly have been so rapid and so successful if Post Office Telephones was still responsible for the nations telephony. Perhaps you are too young to remember when you had to go on a waiting list for the privilege of having a phone installed which, unless you were very lucky, would be a party line.

  • rate this
    -2

    Comment number 4.

    Comment number 1 sums it up perfectly.

  • rate this
    +4

    Comment number 3.

    Only time will tell if the Royal Mail (assuming it can keep that name) floats as well as the Titanic. One thing is certain though. There will be "improvements" to the service such as payment by distance as well as weight and size. The standard rates for local deliveries, and steep rises for anyone in Penzance who wants to send a birthday card to their granny on the Isle of Skye.

  • rate this
    -30

    Comment number 2.

    Simple solution - withdraw the offer of free shares to any worker who goes on strike during the period of the flotation.

  • rate this
    +9

    Comment number 1.

    Well I think this is a very good idea. I mean privatization has worked out really well for the train, energy and water companies both delivering a better service and vastly reduced prices through increased competition. Well done I say.

    Oh wait....

 

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