TNT could buy a minority stake in Royal Mail under a partial privatisation and postal restructuringpackage unveiled yesterday and designed to improve financing of the state-owned British postal
operator, enable it to modernise and secure the country’s universal postal service.The value of the potential transaction, which was welcomed by the UK government, was put at£3 billion (€3.3 billion) by British media. The postal partnership would cover the Royal Mailletters business but not the separate Post Office network. Any agreement, however, would alsocreate an indirect link between TNT Express and Royal Mail’s two parcel businesses Parcelforce andGLS.
The restructuring package was announced in Parliament by the business minister Lord Mandelsonwho presented the results of the 167-page ‘Hooper Report’, the in-depth independent review into theBritish postal services market led by Richard Hooper, former deputy head of communications sectorwatchdog Ofcom.
The postal market had changed dramatically due to the impact of electronic communications,which cost Royal Mail £500 million in lost profits last year, the minister said. At the same time,the postal operator is far less automated and modernised than other Western European counterparts,he pointed out. In addition, Royal Mail is burdened with a large pension deficit and currently hasto pay £780 million a year in contributions. These payments are likely to rise when the fund isre-valued next year. Other challenges are poor labour relations and a lack of trust with the postalregulator.
In response to these challenges, the report recommended that Royal Mail should forge a “strategic minority partnership” with a postal operator with a proven record in transforming itsbusiness, working closely with the workforce. This would give Royal Mail the confidence, theexperience and the capital to make the changes needed to improve performance and face the future. “In other words, save the Royal Mail by investing in its future,” Mandelson commented. The reportnoted that any public listing would face numerous obstacles and not provide access to the necessarycorporate experience of restructuring a large postal operator.
The Hooper report also recommended that the government should take responsibility forsubstantially reducing the company’s massive pension deficit, put at £3.4 billion for 2006, as partof an overall reform package. Moreover, Ofcom should take over responsibility from Postcomm forregulating the UK postal market with a focus on maintaining the universal service.
“Hooper’s conclusions are crystal clear. The status quo is untenable,” Mandelson said. “Theuniversal service is under threat. The choice we face is either downgrading the universal serviceas we manage decline or acting now to turn things round and secure the Royal Mail’s future.” The UKgovernment agreed with the report’s recommendations and planned to implement them as a packagewhile retaining Royal Mail as a publicly-owned enterprise, the minister said.
“Bringing in a partner through a minority stake in the Royal Mail’s postal business will helpus deliver that goal. It will bring the Royal Mail fresh investment, new opportunities to grow inEurope and internationally, and to offer new services. It will provide a fresh new impetus tomodernising the Royal Mail and securing the universal service.” Mandelson said he “very muchwelcomed” TNT’s expression of interest in a strategic partnership with Royal Mail, and would alsowelcome interest from other “credible partners”.
TNT announced that it wanted to explore a strategic partnership with Royal Mail and was readyto enter discussions over a “substantial minority shareholding”, based on implementation of theHooper report’s key recommendations.
CEO Peter Bakker said: “Royal Mail and TNT have explored partnership opportunities in thepast. The views of the Hooper Commission provide a clear framework for the UK postal sector goingforward. Assuming the UK government implements these recommendations, I think that exploring astrategic partnership with Royal Mail makes a lot of sense for both our companies.”
TNT, with overall revenues of €11 billion, generates revenues of over €4.2 billion from itsmail business. In the UK, TNT Post, which competes with Royal Mail, employs close to 1,000 peoplewhile TNT Express employs over 11,000 people. The two TNT companies’ combined UK revenues arearound €1.6 billion.
Royal Mail welcomed the review panel proposals as offering “a strong and secure future” forthe letters business and the post office network, enabling it to form private sector partnershipsand modernise its operations while securing the universal service and maintaining its postaloperations as “an integrated end-to-end business”. Referring to TNT’s expression of interest, CEOAdam Crozier said: “We welcome this approach and will be having discussions with them and any otherpotential partners over the coming weeks and months.”
Initial political reactions to the postal restructuring plans were mixed. There was angrycriticism from some Labour MPs who claimed the ruling party was going back on its election promisenot to privatise Royal Mail. Postal unions responded negatively, while some analysts questioned howmuch freedom TNT might have to restructure Royal Mail.
