Saving the Mail

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http://www.ft.com/cms/s/0/0a48dfca-9e3f ... 07658.html

Royal Mail's future as a state-owned enterprise is bleak. Without radical surgery, and a huge injection of private capital, the postal operator will struggle even to compete let alone prosper when Europe liberalises its mail markets fully in 2011. Lord Mandelson, business secretary, is right to signal his support in principle for the part-privatisation of Royal Mail. Trade unions and Labour party MPs will protest. But the bigger challenge could be finding a buyer.

The political obstacles to privatisation are considerable. The Labour party, under pressure from the Communication Workers' Union, which provides it with funding, promised in its 2005 election manifesto to keep the Royal Mail in public hands. Ditching that pledge now would almost certainly trigger an internal party revolt, something Gordon Brown, prime minister, does not need as he grapples with the global financial and economic crisis.

Yet that confrontation cannot be delayed. Royal Mail has reached the point where ideological opposition to the raising of private capital is a threat to its future.

The government, in opening up the lucrative market for bulk post collection, has demanded efficiency gains from Royal Mail and a commitment to a one-size-goes-anywhere delivery service. This "universal service" obligation has become a millstone for the state operator. In a shrinking market where more people communicate electronically, Royal Mail's letters business is loss-making and unsustainable. That, coupled with a soaring pension scheme deficit, make investment essential if Royal Mail is to modernise and meet the serious competitive challenges lying ahead.

Partnership with the private sector would not only bring in funds, it would encourage greater efficiency, innovation and the flexibility to sustain Royal Mail's delivery obligations. Other European nations have sold stakes in their former monopolies or, like France, plan to. But flotation could take years. A deal with a private equity group such as CVC Capital Partners - which has taken stakes in Post Danmark, the Belgian postal service and Sweden's Posten - or a trade buyer would be preferable, if politically charged.

The problem will be finding such an investor in the current climate. The global credit crunch has made it harder for private equity to raise funds. Few buyers will want to take on a £3.4bn pension deficit that is likely to rise. Lord Mandelson will be reluctant to saddle taxpayers with those liabilities. But he will have to think radically if he is serious about finding a buyer and saving the Mail.

Copyright The Financial Times Limited 2008