Royal Mail 'cannot rule out administration'

Royal Mail today said it could “not rule out” administration as a “hypothetical worst case” scenario if there wasn’t a satisfactory way agreed to finance the company.

The comment came in response to a report in the Independent on Sunday which said Royal Mail – which is currently losing #1.1 million a day – could be “forced into administration” unless it was allowed to raise stamp prices.

A Royal Mail spokesman however stressed that while he could not rule it out it was a hypothetical situation.

Royal Mail is currently awaiting a decision from post regulator Postcomm on future price rises.

The mail group wants to put a penny on the price of a stamp, taking first-class to 28p and second class to 20p. Postcomm has agreed to this but wants a price cap on subsequent rises to 2.5% below retail inflation over three years.

Royal Mail says this would cancel any economic benefits from the price increase.

Chairman Allan Leighton has previously warned that pricing proposals from Postcomm would turn a #510 million revenue boost from the 1p stamp rise into a #460 million “black hole”.

He said that if the regulator would not put forward a straightforward regime it would seek a referral to the Competition Commission of the “complex price constraints” being proposed by Postcomm.

Postcomm is expected to announce a final decision in the coming weeks.

However there are concerns that if Postcomm rejects requests for an increase, Royal Mail may not be able to finance government loans totalling #1 billion.

A spokesman for Royal Mail today said: “If Postcomm try and impose on us the pricing straightjacket they have put forward there is no way we can finance the loans.

“But we need to hear from Postcomm and take a view of what they decide and if they don’t make significant changes we will have to trigger a referral to the Competition Commission.”

He added: “Administration could not be ruled out if there isn’t a way of financing the company.

“But what we want to see is a satisfactory outcome to Postcomm’s price controls so that we can proceed with the #3 billion restructuring plan for Royal Mail.

“We don’t want to get to that situation where administration is an option – we have got a plan to run the Mail’s business commercially.”

“But it is a hypothetical worst case option.”

The Independent said the DTI had warned that if Postcomm rejects requests for an increase in prices then Royal Mail would not be able to pay back three government loans worth more than #1 billion.

The DTI, shareholder and provider of finance to Royal Mail, said in a paper in December that it was essential that as a shareholder it made finance available only on a commercial basis.

“The management cannot look to Government as a soft source of finance,” it said.

It said in the document, posted on Postcomm’s website (page 78, point 23), that if no price increase were allowed “debt cannot be repaid and we do not believe this cash flow could support commercial borrowing”.

The DTI was not immediately available for comment today over whether administration was a possibility for Royal Mail.

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