What future for Royal Mail as Deutsche Post wades into UK with mooted bid for Exel?

Allan Leighton, chairman of Royal Mail, can only look on and weep. While overseas rivals respond to the challenge of deregulation by expanding into new businesses and new territories, he’s condemned to make the best of what he’s got. Trapped within the Treasury controlled boundaries of the public finances, all he can do to meet the challenge of postal competition is slash costs to match the decline in revenues. The already privatised Deutsche Post, by contrast, is moving to reduce its dependence on the German domestic market, where its monopoly is due to end in 2007, by expanding overseas.

Having already bought DHL, Deutsche has now set its sights on Exel, the British logistics company. The fact that Exel used to be known as National Freight Corporation rather gives the game away. Logistics is the fancy, ‘new economy’ name given to freight delivery and road haulage.

Exel would tell you that its business is these days as much about outsourcing of supply chain management as lorry driving, but essentially it’s all the same thing, which is timely delivery of goods from those who supply them to those who need them. The parallels with postal delivery are obvious and it’s easy to see why Deutsche Post, which is already active in the fast deregulating UK postal market, would be interested. It might even be able to use Exel’s position in the UK market to further its attack on Royal Mail.

The negative reaction of the Deutsche Post share price to the news yesterday reflects fears that it will end up overpaying. Even for Deutsche Post, pounds 3.5bn is quite a bite. The valuation demanded by Exel in return for agreement is bound to be a fancy one. Yet as a quoted entity, Deutsche is at least free to tap the capital markets to spend as freely as its shareholders will allow. The same is not true of Royal Mail, which is still wholly state controlled, and quite unlikely, given the politics of it, to be privatised any time soon.

As others take steps to underwrite their future in the face of cross- border competition in postal services by expanding into new spheres of activity, Royal Mail seems condemned only to a future of contraction. The case for privatisation has never been stronger, if only to give the company a chance of survival in a fast changing world, yet still in the thrall of the posties, the Government refuses to act.

This is not exactly a manifesto pledge. Labour has only said there are no plans to privatise, which is not quite the same thing as ruling it out. But given how much else the Prime Minister has on his plate, he’s unlikely to risk the wrath of his party by giving this beleaguered company its freedom.

Besides, the responsible minister, Alan Johnson, Secretary of State for Trade and Industry, is himself a former postie. The tragedy is that he may be condemning his beloved former employer to oblivion by refusing privatisation at the same time as throwing the postal market open to competition. Germany seems to have handled these reforms much better than Britain.