UK Royal Mail seeks alliance with American parcel giant

TWO of the world’s biggest postal groups, Fedex Corporation and UPS, are in advanced negotiations to set up a groundbreaking European strategic alliance with Royal Mail.
Allan Leighton, chairman of Royal Mail, is still deciding which of the two potential American-owned partners to pick but it is thought he is close to creating a new company that could transform the financial prospects of the British mail group. Last week Royal Mail received a £3 billion bail-out to help resolve its huge pension deficit, modernise its letters business and fund the loss-making rural post office network.

But Leighton did not reveal the talks with the two US postal giants — Fedex, which is capitalised at $33 billion (£17.5 billion), and UPS, worth $52 billion. He wants the European operations of Fedex or UPS to team up with Royal Mail’s General Logistics Systems. GLS runs a pan-European parcels business and is Royal Mail’s most profitable operation.

It made sales of £1 billion last year and earnings before tax, depreciation and amoritisation of £100m. This figure could double over the next two years.

A source familiar with the talks said the big attraction for Royal Mail is that its European parcels business is unregulated and, unlike in Britain, its charges are not set by a third party. Leighton wants to use GLS to attack the postal markets of Germany and France in the same way that overseas companies are trying to break into the British market. It is hoped this will lead to making a big inroad into parcels and letters, as well as the booming “packet” business that has exploded thanks largely to Amazon and other online retailers.

A European partnership would give GLS a commanding position and the intention is to combine delivery networks. The aim is to eventually break into Asia and India.

UPS employs just under a tenth of its 407,000 workforce in Europe and runs a 7,000- strong delivery fleet. GLS has subsidiary operations in 17 European countries, employs 14,500, has 52 depots, 4,580 vehicles and promises delivery across Europe within a 24 to 96-hour period. Fedex has operations in 215 countries and delivers more than 6m shipments every business day, but does not have operations in all European countries.

Fedex already has an alliance with Geopost, the parcel and logistics company owned by La Poste, the French operator. This enables it to provide services in France and Belgium.

It is thought that GLS, as a standalone business, is worth at least £1 billion but, under a new ownership structure with a partner, this could grow.

The identity of GLS’s partner will be watched closely by European rivals. The continental postal market will eventually open up to competition in the same way as Britain has, and Leighton wants the infrastructure in place to be a leading player in the consolidation.

CEP Research 22/5/06
Royal Mail reportedly in talks with UPS, FedEx

Royal Mail is in advanced negotiations with FedEx and UPS over a strategic alliance between one of the two US giants and its highly-profitable European parcels subsidiary, General Logistics Systems (GLS), according to British media reports.

The Sunday Times, citing “a source familiar with the talks”, reported that the UK postal operator wanted to link up GLS with the European operations of either FedEx or UPS, but that a final decision on which US partner to select had not yet been made. The two networks would be combined into a single European operation.

According to the report, Royal Mail wanted to use GLS to attack other EU postal markets such as Germany in response to the entry of foreign companies into the now fully-liberalised UK market. It also aimed to profit from growing e-commerce parcel volumes.

Royal Mail described the report as “speculation” and declined to comment further. Industry experts noted that speculation about a potential link-up between GLS and a larger international parcels and express company has circulated widely in the express industry in recent years.

GLS has grown strongly over the last few years, consolidated its European subsidiaries, introduced harmonised European parcel services and products, and launched the creation of a pan-European “parcel shop” network for consumers and small businesses. This currently offers parcel drop-off and collection, but could be enhanced to cover mail services once European postal markets are fully liberalised. It also has plans to set up a European air express operation.

It continued its strong improvement in profitability in the year ending March 31, 2006 with a 37% rise in operating profits to £100 million, up from £73 million in 2004-05. Its revenues rose 13.6% to £1,037 million, while volumes grew 14% to 293 million parcels. Its operating margin was 9.6%. Royal Mail chairman Allan Leighton described GLS as "a star performer" and also commented that the company would maintain its current strategy, invest further in its network and "continue to play a part in market consolidation".

Of the two US giants, UPS has a large business in Europe that it aims to grow further. It has bought UK domestic parcels carrier Lynx Express and Poland’s Stolica over the last year. FedEx currently focuses more on international air express volumes to and from Europe. It has a strategic alliance with France’s La Poste group under which the latter’s express subsidiary GeoPost, and its DPD business, uses FedEx for intercontinental traffic, while FedEx feeds volumes into the DPD network for European distribution.

ROYAL MAIL `IN TALKS OVER EURO PARCELS GIANT'
PA News, p 1 05-21-2006
By PA City Staff By Hugo Duncan
Royal Mail is in talks with two of the world's biggest postal groups over the creation of a European parcels giant, it was reported today.

Royal Mail is in advanced negotiations with United States-based operators Fedex Corporation and UPS to set up a ground-breaking strategic alliance in Europe, according to the Sunday Times.

Chairman Allan Leighton is said to want the European operations of either Fedex or UPS to team up with Royal Mail's General Logistics Systems (GLS), which runs a pan-European parcels business and is the company's most profitable operation.

It generated sales of £1 billion last year and profits of £100 million, and it is thought that this figure could double over the next two years.

A tie-up with a US partner would mean that GLS could move into postal markets in Germany and France and eventually look to break into Asia and India.

It would also give them greater exposure to the booming packet business which has exploded thanks to online retailers such as Amazon.

A deal with Fedex or UPS could transform the financial prospects of Royal Mail, which just days ago secured a Government-backed package worth £3 billion to modernise the network and tackle its huge pension fund deficit.

Mr Leighton stressed that the £3 billion was not a Government “bail out” or state aid, but freed up millions of pounds of the Royal Mail's reserves as well as giving it the chance to borrow £900 million.

Royal Mail increased its profits by 17.5% last year, triggering bonus payments of more than £400 for postal workers and sub-postmasters across the country.

Operating profits in the last financial year, calculated under new accountancy standards, were £355 million, with all of the Royal Mail's businesses improving their financial performance.

Royal Mail said the “outstanding” financial result meant that its 180,000 workers will each receive a bonus of £418, amounting to a payout of almost £100m.

Chief executive Adam Crozier said one of the main challenges now was tackling the pension fund deficit, which grew last year from £4.5 billion to £5.6 billion.