Britain's centuries-old Royal Mail eyes end of state control

LONDON Wed Jul 31, 2013 1:05pm EDT

1 of 2. A sheet of Penny Black stamps, bearing the head of Queen Victoria, are seen at the British Postal Museum in London July 26, 2013.

Credit: Reuters/Olivia Harris

LONDON (Reuters) - After three aborted privatization attempts in 19 years, Britain's Royal Mail postal service looks closer than ever to a sale that would end almost five centuries of ties to the state.

But the centre-right coalition government must first convince investors, nervous lawmakers and a heavily unionized workforce still opposed to private ownership.

Although the sale proceeds, estimated at 1-1.5 billion pounds ($1.52-2.27 billion), won't make a big dent in Britain's 1.5 trillion pound debt, the opposition Labour party says the deal is being rushed through to improve borrowing figures and that a profitable Royal Mail should stay public.

Business Minister Michael Fallon, the man behind the sale, argues that schools and hospitals come first for public money.

For Fallon and Royal Mail's management, privatization will help it tap private cash and modernize to better compete in a parcels market that is growing fast thanks to an online shopping boom led by the likes of Amazon (AMZN.O) and Ebay (EBAY.O).

"The fact that it is profitable makes it more urgent, actually, to seize the opportunity and to put it onto a long-term sustainable basis," Fallon told Reuters in his office decorated with the symbols of Britain's privatizing past. A model British Airways plane sits on a table and an 'The Iron Lady' Margaret Thatcher film poster adorns the wall.

The biggest hurdle is likely to be politics.

Moves to privatize Royal Mail in 1994, 1998 and 2008 were undone by opposition from within the governing majority, which feared an electoral backlash from tampering with a revered institution whose red post-boxes are known around the world.

Since the wave of privatizations kicked off by former Prime Minister Thatcher in the 1980s, public attitudes towards the sale of vital state infrastructure have, if anything, hardened.

The privatization of Britain's rail network in the 1990s has proven a costly embarrassment. Successive governments have farmed more public services out to the private sector but, when things go wrong, government officials often get the blame.

The government led by Thatcher's ideological heirs in the Conservative party insists Royal Mail will be sold, but concedes it must do more to convince the public. Fallon needs to ensure the price tag sees off accusations of a firesale, yet appeals to long-term backers able to provide financial security.

A recent poll by YouGov showed only 53 percent of the public even knew of the privatization. But 67 percent of respondents opposed the sale, including 36 percent who strongly opposed it.

"For me as a backbencher, the question is will the public back this move?" said Nick de Bois, a Conservative member of parliament and a secretary of the influential '1922 Committee' which is regarded as a barometer on the party's mood.

UNION HOSTILITY

There are examples of privatized state postal services making healthy profits. Three from continental Europe, including Germany's Deutsche Post (DPWGn.DE), trade in line with the biggest listed UK companies on a price-to-earnings multiple for the next 12 months.

The government wants to sell a majority stake in Royal Mail by March 31 next year, and as a sweetener hand 10 percent of it to staff for free - the largest giveaway of any major UK privatization. Analysts expect the initial public offering (IPO) to value Royal Mail at 2-3 billion pounds, so selling a majority stake could raise over 1 billion pounds for the government.

It has hired Goldman Sachs (GS.N) and UBS (UBSN.VX) to drum up interest in the country's biggest privatization in 20 years, hoping investors decide the firm's focus on the growing business in internet-ordered parcels will compensate for the personal letter's slow death-by-email.

As well as institutional investors like pension funds and insurance companies, the public would also have the chance to own a slice of a company with origins that date back to 1516, when mail was delivered by horse from King Henry VIII's court.

A sale to a sovereign wealth fund or to private equity firms is a plan B, but feedback suggests healthy investor appetite for a listing, which would grow further if management reaches a deal with the unions.

In June, 80,000 postal workers from the Communication Workers Union (CWU) voted to oppose the sell-off and union leaders are considering strike action to try and force a u-turn.

"Who would want to put their money into a company where all the workers are opposed to privatization?" said Bernard McBride, a Royal Mail worker for 23 years from Doncaster.

One UK fund manager who asked not to be named said easing tensions with union was a prerequisite for any investment.

"We'll look at that (IPO) when it comes," he said. "The share offer to staff doesn't seem to have achieved a great deal in calming the waters there, does it?"

Pay and conditions at Royal Mail compare favorably to the private sector. Unions also say privatization could jeopardize Royal Mail's six-days-a-week, anywhere Universal Service Obligation (USO), speculating that Saturday services and expensive rural deliveries could be axed in pursuit of profit.

Royal Mail says the USO is enshrined in law and a change of ownership won't bring changes to worker wages and conditions. Britain's network of post offices, many of them lifelines for small rural communities, will remain in state hands.

Royal Mail struggled after 2006 when UK postal services were fully liberalized. In the past decade 50,000 jobs have been cut and 25 mail centers have shut.

It says that with privatization comes access to the external capital it needs to reshape a letter-led business, where numbers fell by 5 million last year, toward a growing parcels market.

With that in mind, Royal Mail wants cash for things like bigger vans, tracking services and automating machinery.

NEW LEADERSHIP

Annual operating profit in 2013 more than doubled to 403 million pounds, a revival led by Canadian CEO Moya Greene, the first woman and non-Briton to lead the firm which she described as "technically insolvent" upon joining in July 2010.

Greene, 59, who helped privatize Canadian National Railway, has managed to ease regulation on the firm, enabling price hikes and leaving less than 10 percent of its UK revenue subject to price control. The government has also cleansed the group's balance sheet of a 10-billion-pound pension deficit.

Parcels from the likes of Amazon and Marks and Spencer (MKS.L) delivered through Royal Mail's universal service and its express arm Parcelforce make up almost half of the group's 9.15 billion pounds of revenue.

"I'm sure (Royal Mail's) prospectus will play up a growth story with ecommerce and parcels," said Davy analyst Stephen Furlong. "I would be surprised if there's not investor appetite for this."

But competition is fierce. Rivals are free to take on Royal Mail in commercial parcels, a market driven by online retail - expected to account for 12.4 percent of Britain's GDP by 2016.

The firm's letters business is more protected by regulator Ofcom, which must ensure the firm is able to meet its USO.

However, the first threat could be on the horizon, with Dutch-owned TNT Post UK planning to launch Britain's first rival business mail delivery service in five years' time. Ofcom says it will allow competition, but will protect Royal Mail if anything threatens its ability to honor the USO.

To seal a deal, Royal Mail's Greene has been on a charm offensive in the U.S., Canada and Britain. With an eye on an autumn listing, Fallon says feedback suggests it is working.

"This is an opportunity we simply mustn't miss," said Fallon. It was time, he said, to "culturally start to move this business away from this building, so as to not have to come in and ask ministers' permission to buy a photocopier". ($1 = 0.6553 British pounds)

(Additional reporting by Sinead Cruise; editing by Tom Pfeiffer)

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