DTI in talks over GBP 2bn UK Royal Mail investment

Royal Mail could be in line for a GBP 2 billion cash injection if talks between the Department of Trade and Industry and a number of banks are successful.

The DTI was today reported to be in discussions with HSBC, Lazard and Merrill Lynch about the possibility of mounting a rights issue at Royal Mail, which would give the Government more shares in the postal group in return for the investment.

Although the Government is the sole shareholder in Royal Mail, it has only half of the 100,000 shares created when the group became a publicly-owned company five years ago.

Royal Mail kept 50,000 shares but can only allocate them to the Government. The Trade and Industry Secretary received 49,999 shares, while the Treasury solicitor holds both the remaining shares and a separate special share.

Royal Mail wants to hand out 20 per cent of its shares to its employees as part of a restructuring plan, but 192 Labour MPs have signed a Commons motion protesting that any change of ownership was a lead to privatisation.

A spokeswoman for the postal group said: “Engaging our people is absolutely vital if we are to meet the huge challenge of competing in an open market – that’s why we want our people to have a 20 per cent stake in the business.”

Royal Mail chairman Allan Leighton wants the cash boost from a rights issue to buy automated equipment, which he says is needed to catch up with its rivals. The group faces full competition on all parts of the market from January 1 next year.

It also has a deficit in its pension fund of GBP 4.2bn that could soon rise to GBP 6.2bn, while pay demands could add GBP 750 million to the annual wage bill.

The Government has said that any cash given to Royal Mail must be on a commercial basis, but Mr Leighton insisted a rights issue would satisfy that demand.

Royal Mail intends to draw up detailed proposals on the issue by the middle of next month. It has already announced the cost of first-class mail is to rise by two pence next year while the Treasury has been asked to waive dividend payments to the Government on the shares it currently holds.

Last month, Royal Mail delivered a 20 per cent rise in first-half operating profit to GBP 159m but warned that earnings in its letters business had fallen.

The improvement was driven by better financial performance in the European parcels and Parcelforce arms. Mail volumes fell for the first time in 25 years apart from a dip three years ago.

Profitable bulk mail slumped by 7.1 per cent, with first class letters falling by 4.2 per cent.

Mr Leighton said at the time: “These latest results underline the massive and unprecedented challenges facing Royal Mail.”