Is the Royal Mail worth privatising? (and whence the Post Office?)

As the Government prepares to publish its Royal Mail privatisation plan, a report that it could be worth as little as £700m...

by James Taylor

Today will see the first reading of the Postal Services Bill, the legislation that will allow for the privatisation of (some of) the Royal Mail. Vince Cable calls it a 'once-in-a-generation chance to transform the culture at Royal Mail' - but it's already proving a tough sell politically, with some protesting that it could sound the death knell for the Post Office. Less predictably, today's Times quotes a new report suggesting that the bits of the Royal Mail likely to be sold off could be worth as little as £700m. At that price, it isn't exactly going to solve the Treasury's financial worries at a stroke...

The valuation quoted by the Times comes from Trova Consulting, a corporate advisory firm, and it's significant because it's the first independent assessment of the Royal Mail's worth. Trova reckons that if the Royal Mail has to cut jobs, and this leads to strike action which accelerates the decline of letter volumes (by no means implausible), the letters business could be worth as little as £360m. Even if you throw in £2bn for its European courier business GLS, and another £350m or so for Parcelforce, that's a total value of about £2.7bn. Strip out the £2bn of Government-backed debt, and that leaves you with a figure of about £700m.

Now admittedly, this is very much a worse case scenario. If the decline in letter volumes slows slightly (it was 7% last year), if the proposed £200m in modernisation savings actually materialise, and if the Government relaxes some of its regulatory requirements (like the universal service - though it promised not to today), Royal Mail could be worth a lot more: in fact, Trova's 'base case' (which it's calculated with reference to other European firms operating in the same space) gives it an equity value of £5.7bn, the Times reports. So as much as anything, this shows how difficult is to put a value on the business - so many assumptions are required, all of which could be wrong.

It's a bit hard to see how the Royal Mail can survive and thrive without an injection of fresh capital - and at the moment, that means the private sector. But complications like these will make it even harder for the Government to sell the policy to its many opponents (and to the company's staff, who stand to get about 10% of the business as a windfall).

The fate of the Post Office is also likely to be a bone of contention. Cable floated the idea today of a John Lewis-style mutualisation, giving subpostmasters and employees a greater say in how the business is run. But the general secretary of the National Federation of Subpostmasters has been complaining that unless the newly-privatised Royal Mail is forced to keep using the 12,000-strong Post Office branch network to sell its products and services, the latter might go bust anyway - he argues that a transitional deal is needed while the Post Office works out how else to make money. Better late than never, we suppose.

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