Can there be a float and strike at Royal Mail?


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

    Comment number 40.

    A couple of minor details to supplement the article. First a massive increase in postal charges which fund a service for which there is no effective competition may explain the cheerful profits. Second the nationalisation of the pension fund thus removing the extensive liabilities of the scheme which are transferred to the private sector. So 'Sid' will suffer a double whammy again.

  • rate this

    Comment number 39.

    Little mention of the taxpayer underwriting the existing Pension Fund - will probably wipe out a large proportion of the revenue from share sales. Another Tory con.

  • rate this

    Comment number 38.

    Dear German / French governments - here is a gift wrapped monopoly for you to pick up for a song.
    Yours faithfully
    Her Majesty's Government (of Stupidity and Dogma)

    Even the Mad Old Witch thought this an ill idea.

  • rate this

    Comment number 37.

    For years, I attempted to help support Royal Mail & local post office. As a result of RMs 2013 changes it became financially impossible to continue.

    Its a fix, a set up, a carrot for privatisation

    Then there the BIGGEST CON/RIP OFF of taxpayers, transfer of RMs pensions to state, with £MULTI billion DEBT black hole that UK taxpayers & pensions are now liable for

  • rate this

    Comment number 36.

    Once again, dogma trumps common sense!

    Give it 5 years and it'll be owned by the German government!

  • rate this

    Comment number 35.

    Dear Dave - I have £3 Bn to spend... I would like to buy any currently private company in the UK that can turn in 200m+ profit a year...but before I do what I'd like you to do is get rid of all the companies debts.. particularly the pension pot, you could keep that bit owned by the nation, increase the deficit at bit. No one will notice.

    Oh and you want a job in 2015 just hit me up.

  • rate this

    Comment number 34.

    25. MBeth
    Thatcher proved to the world that privatisation improves efficiency, increases competition and raises revenue

    I am assuming this is meant to be some sort of irony. Unfortunately there are a few people actually stupid enough to believe it, while anyone with any sense is calling for power, water and transport to be brought back into public ownership to repair the damage Thatcher did.

  • rate this

    Comment number 33.

    Nothing good will come of this for the British public. Service will drop, costs will rise & another privates business(es) will be added to the list of those who receive taxpayer subsidy.
    Some politicians will profit from it though, I expect some honorary directorships to be handed out in years to come when people have left office & the public have forgotten (if they ever cared to begin with).

  • rate this

    Comment number 32.

    Royal Mail is like our other Nationalised Institutions were aka British Rail, British Shipbuilding, British Coal, British Leyland, out of touch and from another age a rest home for the idle and the unions. No wonder they were cast to the dustbin, I agree with #25 MBeth regarding the NHS, it would be far more efficient and with a lot less top heavy bureaucracy.

  • rate this

    Comment number 31.

    goodbye nationwide post service :( it will be a very sad day for those who will become even more isolated as whoever takes control gets rid of unprofitable public services like allowing people in rural areas to get post.

  • rate this

    Comment number 30.

    If this had been mentioned in their manifestos at the last election do you think they would have been able to form a government ?
    In a democracy you need a mandate to do something like this. We do not have a democracy.

  • rate this

    Comment number 29.

    Give it 5 years and most of Royal Mail will be public owned again just like EDF. Just not the British public.

  • rate this

    Comment number 28.

    Lateral thinking: If the workers are getting 10% of the shares gratis and 41% are being sold, then the CWU only needs to raise around £1.2bn in order to gain a controlling interest and write their own terms and conditions of service. Sounds like a win all round - especially since the union could then use the dividends to replace their dwindling subscription revenue.

  • rate this

    Comment number 27.

    Vince Cable is making a huge mistake here! Royal Mail made a massive profit of over £300million last year. Just when the Public purse can reap the rewards of all the hard work that the employees have put into Royal Mail, Vince sells it to the City of London. Another opportunity for the Market to drain wealth from the regions into London!
    This is a very exciting day for the city of London!

  • rate this

    Comment number 26.

    Royal Mails attrocious (simplification) out of touch changes to package sizes & price increases this year resulted in my moving 75% of my business packages with another courier, by doing so I save £4.12 on each recorded package sent. If 1st delivery attempt fails, a 2nd & 3rd attempt is made over following days = no failed deliverys at all.

    RMs parcels setup just cannot compete with others

  • rate this

    Comment number 25.

    It's about time our mail system was privatised, along with all other nationalised systems including the NHS . Thatcher proved to the world that privatisation improves efficiency, increases competition and raises revenue for the government out of the sale of previously nationalised bodies.
    Go Thatcher, go private, stop moaning.

  • rate this

    Comment number 24.

    Should have been done years ago.

  • rate this

    Comment number 23.

    This proposed Royal Mail sell off is a Giant Leap too far. We entrust our documents & parcels to an official state run organisation not a bunch of profit first cowboys who are funding the Tory Party.

  • rate this

    Comment number 22.

    Why are the Tories hell bent on selling off everything...telephones, water (look after the shareholders first). electricity, gas, and trains, all this profit going to shareholders and not the country. Whats wrong with state ownership? It worked for our greedy Banks and it works for EDF (French part owned)....what next ??? NHS....

  • rate this

    Comment number 21.

    Just another of our key assets that will ultimately end up in foreign hands


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