UK's Royal Mail Set to Be Privatized in 2013

The coalition government aims to begin the privatization of Royal Mail by selling or floating at least part of it in autumn 2013 if the state-owned postal operator’s finances continue to improve.

A Royal Mail postal worker, delivers mail on his round in London, U.K., on Monday, July 4, 2011. to mail centers in Greater London.
A Royal Mail postal worker, delivers mail on his round in London, U.K., on Monday, July 4, 2011. to mail centers in Greater London.

The sell-off would be Britain’s most ambitious privatization since John Major broke up and sold the railways in the 1990s. Analysts think Royal Mail could be worth up to £3 billion-£4 billion.

The government is attracted to a stock market flotation if the financial climate for initial public offerings improves, according to people close to the sale process. Options are also open for a sale to an industry or private equity buyer.

A flotation is likely to involve a sale of shares to the public as well as institutions, backed by a marketing effort like the 1986 “Tell Sid” campaign to sell British Gas.

“We see no reason why this company should not be IPO-able,” said one senior insider. “Royal Mail is viewed with a high level of affection by the public. That could easily play well into an IPO situation.”

Privatization is likely to begin with a partial sell-off, with the rest sold later, but a full sale at the outset is not ruled out. Royal Mail employees would get a stake of at least 10 percent when privatization is completed. The Post Office network would remain in the public sector and may be mutilated.

The coalition has passed legislation to privatize Royal Mail, which previous efforts by Conservative and Labor governments failed to achieve over the past 20 years. But the company is losing letters traffic heavily to email and social media.

An important step was achieved last week when the European Commission approved the government taking over Royal Mail’s £9.5 billion pension deficit and writing off £1 billion of its £1.7 billion debt.

In the next few days Ofcom, the communications regulator, is expected to confirm a shift to a lighter-touch regulatory regime that will boost Royal Mail’s prospects by freeing it to set prices for the majority of its products.

Ofcom has been consulting on capped increases of up to 50 percent on second-class stamps and limitless price rises for first-class.

Royal Mail has accelerated its drive to introduce new technology and modernize working practices, but government insiders believe it will need to demonstrate a year of financial progress under the new regulatory regime before investors can be persuaded to buy shares.

Royal Mail, which has a £9 billion turnover, needs to improve its profit margins and demonstrate strength in packets and parcels.

Operating profit for the six months to September 2011 rose from £22 million to £67 million, but that was entirely due to the contribution of its GLASS European parcels arm and the Post Office business. The letters and parcels delivery businesscut its loss from £55 million to £41 million.