Treasury could lose £900 million in Royal Mail sell-off

By Gavin Hayes

The proposed part privatisation of Royal Mail, as detailed in the Hooper Report, has taken another hammer blow today from new financial analysis carried out by Compass. It has found that the likely revenue that could be raised by a 49% sale of Royal Mail to an external equity partner would see the Treasury net less than half the value they would have secured just a year ago.

Should the Business Secretary, Lord Mandelson, succeed in railroading through Hooper’s recommendations (breaking one of Labour’s key 2005 manifesto commitments and Labour Party policy in the process), the price for a share of Royal Mail will be based on a multiple of 8 times earnings, conservatively estimated at £250 million for 2008/09. So in other words, a 49% stake would cost an external investor roughly £1 billion.

Of course, the financial downturn has a part to play in this calculation – as recently as last year the price would have been based on 15 times earnings. If Royal Mail were sold on those terms, the national coffers would be £1.9 billion better off in the short-term – almost double what Hooper’s proposal would bring in now. The government must therefore look at the poor state of the market and come up with a new plan to modernise the Royal Mail that doesn’t involve selling shares at rock bottom prices and losing hundreds of £millions in revenue in the process.
If you transpose this analysis onto the continental operators that Hooper uses as examples, there is a similar picture. If TNT had been sold at the height of the market in 2007 it would have been valued at around £11 billion. Today its sale would secure only £4 billion. Less than a year ago the sale of Deutsche Post would have secured around £21 billion, today it would be lucky to raise £8.5 billion.

Nonetheless a sum of £1 billion could be seen as an attractive one-off windfall for a government struggling with its Budget during the current economic crisis. But why sell the family silver when this short term gain could be wiped out in less than two years if Royal Mail stays wholly public. With an annual profit of £630 million, which takes into account the funding of an annual £280m pension deficit and the loss of £100m in unfair access charges to private companies using the network, given these figures it is hard to see the attraction of a fire sale. Keeping these profits in public hands means they will be reinvested in the business to modernise it, could be used to provide better services and crucially money will not be lost through paying out dividends to shareholders.

John Grogan MP has today quite rightly urged the government to think again, and said that the findings show how “part privatisation would represent a bad deal for the government and for the British public. Labour MPs will now be even less likely to support part privatisation once they see these figures” – he’s absolutely right.

Grave concern about a bad deal for taxpayers is broadened by the lack of interest in a part sale offer. Only TNT have shown any public interest, mainly because of the scarcity of available finance in the money markets for big ticket purchases like this.

Most worrying are the prospects for quality of service. Advisors to companies such as TNT and Deutsche Post will be telling their Chief Executives that they can increase their forward earnings through a cut price purchase of Royal Mail, allowing subsequent big cuts in jobs and services, which as one off costs are not included in forward earnings calculations.

So these findings will be very hard indeed to simply ignore, and gives further incontrovertible evidence that the Hooper report and proposed part-privatisation is a case not made. Even if you think it makes sense to sell, it makes no sense whatsoever to sell now.

Compass will shortly be publishing our own proposals and positive vision for a modernised post service that remains in public hands – keep an eye out for further updates on this important campaign.