Financial News

Six Day Delivery Pledge May Hamstring Royal Mail IPO

The Royal Mail initial public offering is a mixed bag for investors – and may not go as well as expected.

One big problem was the £12 billion pension deficit, but the government has filled the void and promised the new company will start with a clean pension slate.

That removed a huge issue for many investors, but two problems still remain – both related to the government.

A huge unknown for investors is the government’s insistence that the Royal Mail must continue to run a six-day delivery service nationwide.

The fears are that this makes the business uncompetitive, as maintaining the six-day promise will not allow the new managers to make the most of their resources and run a cost-effective service.

Many businesses do not even need a six-day a week postal service as their administrative staffs do not work weekends any way.

Government stake

And as correspondence switches from paper to digital delivery with email, texts and social media sites, the Royal Mail has to look to the future.

Rather than letter delivery, distributing parcels for online stores is becoming a game changer for the Royal Mail and is taking the new business into uncharted waters where competition is fierce and delivery firms cut costs to the bone.

Few maintain a six-day delivery service, and having to do so could well by the Royal Mail’s Achilles ’ heel.

Then comes the government stake in the new business. The shareholding will be less than 50% but how much less and how much call over a private investment will the government maintain?

“No one knows how much the government will keep although it will be less than 50 per cent,” said Richard Hunter, of financial firm Hargreaves Lansdowne. “Investors will want the government’s role in the new business clearly defined.”

Sticking point

One of the worst outcomes could be renationalisation and how private shareholders would be compensated.

The Royal Mail IPO is likely to spark interest with many small investors – much like the BT and British Gas sell offs many years ago.

More recent IPOs, like Direct Line and eSure to raise cash for the beleaguered Royal Bank of Scotland, are a case in point.

However, the Royal Mail IPO may be hamstrung as a business because of the six-day universal service requirement and could prove to be a sticking point for doubters.

Undoubtedly, the shares will sell, but the government may not raise the expected amount of cash or investors could be left with over-valued holdings.

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