Royal Mail: privatization of strategic interest

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Plans to part-privatize Royal Mail are attracting strong interest in its parcel division, which focuses on the more resilient road and home delivery market sectors. It currently holds an estimated 7% share in the European express market and is well positioned given the current economic climate, making it an interesting target for companies wanting to increase their footprint in these growth areas.

The current political debate on whether to sell a partial stake in one of the few remaining publicly-owned corporations in the UK has raised huge concerns within the British government, not to mention among Royal Mail workers and unions. The possible sale has also captured the interest of a number of postal and express operators, including global express integrator TNT (owned by the Dutch post office and also active in the UK mail market), FedEx, the Belgian Post Office (part owned by private equity firm CVC) and the Swedish and Danish postal operators, which are finalizing their own merger.

Despite facing financial difficulty for future pension provisions, Royal Mail has been profitable over the last few years and its parcel divisions, Parcelforce (UK) and GLS (rest of Europe), have fared relatively well. Outside its home market, it is especially strong in Denmark and the Benelux countries. Furthermore, its focus on road-based services, home delivery services and the construction of a network of service points has put Royal Mail in a good position to exploit opportunities in the more resilient 'economy' and B2C segments of the parcels market, which as a whole is expected to contract in 2009.

Should the privatization go ahead and some kind of integration of Royal Mail's parcel divisions into another network become a reality, it would lead to further consolidation in the European express market, which would significantly alter the competitive landscape within it. Royal Mail, including its UK parcel subsidiary Parcelforce and its European network GLS, are ranked fifth in the express market, according to Datamonitor's European Express Benchmarking report, and should any deal take place, the resultant entity would put additional pressure on the other major players in this market not least by strengthening its presence in areas currently not covered.

A tie-up with TNT, for example, would create a conglomerate challenging the hegemony of DHL/Deutsche Post, as its combined share of nearly 17% of the total express and parcels market in Europe's main country markets would almost equal DHL/Deutsche Post's share. For FedEx, a deal with Royal Mail would supply it with the network it requires in Europe, as its involvement in the US premium air sector leaves it exposed in a market characterized by a shift from air to road and the downgrading of express and parcel services by its customers.

Other advantages could lie in the realization of economies of scale, as respective companies' operations potentially overlap in areas such as sortation and delivery. An acquisition by a smaller postal network could allow it to expand into areas that are currently not part of its remit. Generally, as the express and parcels market faces the global downturn, a strategic partnership of some kind seems a logical next step for its main participants.