Deutsche Post chief: Royal Mail will be difficult to privatise
Deutsche Post chief executive Frank Appel said today he believed it would be very difficult for a post like Royal Mail to attract investors when it seeks privatisation from late 2013. Speaking at the World Mail and Express Europe conference in Geneva today, the head of the world’s biggest logistics company, which had its own Initial Public Offering in the year 2000, said in the current market situation it would not be clear enough to investors how a mail company like Royal Mail would generate growth going forward.
Appel, whose company went public when the mail was still making big profits, said: “I can’t see how you can privatise the postal operator now. Why would you invest in a postal operator without a clear growth strategy? It is a huge challenge in my view because how do you explain that this is a good investment going forward?”
The German postal service CEO was speaking following a speech from Royal Mail Group chief executive Moya Greene in which she conceded that it would be very difficult for her company to attract investors as is currently planned by the UK government.
Greene said that despite taking her company back to solvency and transferring its “crippling” GBP 28bn legacy pension liabilities to the government, Royal Mail will be facing “the worst market anyone has faced in 30 years” in terms of privatisation of a major public service.
Deutsche Post DHL CEO Frank Appel said the situation was very different for his company when it went through one of Germany’s biggest ever IPOs in 2000
She said today: “Government has asked me to prepare the company to access outside capital by the end of 2013. Even if our plans are successful in the company I fear we will be facing pretty heavy weather in the markets.”
Responding to Appel’s warning, Greene said the UK had tried to privatise Royal Mail five times before, but this was the “best chance” yet.
“Investors are going to invest in strong even margins, a clean balance sheet, reasonable growth and sufficient cash to make sure that dividends can be ensured,” she said.
“I think we have a better chance of trying to sell now than (when we were) an insolvent company that had the worst regulatory situation on the planet.”
Improvement
Greene said when Royal Mail announces its latest results in a few years time, it will be showing an EBIT margin that has increased threefold from the 0.4% seen three years ago.
Other facets of the business she said would make it attractive to investors included the fact that the booming parcels market now accounts for over 50% of group revenue, compared to 40% of revenue from letter mail, while in part thanks to the European parcel business GLS, around 20% of group revenue comes from outside the UK.
She also noted the important GBP 1bn annual revenue from direct marketing, an area in which Royal Mail is expanding value added services such as through its new Market Reach service.
The major difference in the turnaround for Royal Mail was the new regulator, Greene said, stating that the old Postcomm regulator had been the biggest problem the company faced as it lost GBP in its core mail business over the past four years. Now regulated by communications industry agency Ofcom, a new framework sees the proportion of Royal Mail’s revenues subjected to price controls reduced from around 85% to around 20%, she said.
“I think we have a better chance of trying to sell now” – Moya Greene
Although a lot of barriers have been overcome on the way to privatisation, Greene said there was still a “year of heavy lifting” ahead, as further modernisation efforts continue, including consolidation of mail facilities and changes in delivery processes to gear operations to an increasing proportion of parcels in the mailstream.
Improvement in the parcel sector should come with a widely expected industry-wide increase in delivery rates, particularly for e-commerce merchants, whom Greene said had been essentially subsidised by order of Postcomm for years because of its refusal to allow rate increases.
With only three parcel delivery companies in the highly competitive UK market currently profitable, Greene said the pricing landscape of UK parcels, particularly for ecommerce merchants, was about to change.
“I’m certainly going to raise my prices,” Greene said.
