Comparison with European Postal Service companies

Deutsche Post: In 2000, the majority of Deutsche Post shares have been sold. Germany has a 21.0% stake in Deutsche Post but it’s considering the sale of at least part of its stake.

Austria Post: In 2006 the post office in Austria has been privatized to varying degrees. However, the government still has a controlling interest. The Austrian Government indirectly owns the 52.8% of its post office.

In the following table compares Royal Mail with Deutsche Post and Austria Post, in terms of revenues, earnings and profits.

| Royal Mail | Deutsche Post | Austria Post | Revenues (£m) | 9,279 | 46,347 | 1,975 | Earnings before interest and taxation (£m) | 367 | 2,225 | 152 | Earnings (or profit) | 562 | 1,384 | 103 | Share Price (£m) | £5.64 | £20.48 | £30.01 | Market Capitalization (£m) | 5,640 | 24,758 | 2,028 | Earnings per share | £0.56 | £1.15 | £1.52 | P/E ratio | 10.0 | 17.9 | 19.7 | Return on Sales | 3.96% | 4.80% | 7.70% | % state of ownership | 30.00% | 21.00% | 52.80% | | | | |
Financial performance

The revenues of Royal Mail, at £9.3 billion, are significantly higher than Austrian (£2.0 billion). However, Deutsche Post’s revenues, at £46.3 billion are nearly five times greater than the revenues for Royal Mail.

Profits measured by earnings before interest and taxation has increased for Royal Mail from £277 million in 2010/11 to £367 million in 2011/12. This is mainly due to revenue growth. Parcel revenue increased 13 per cent year on year, with letters revenue growing three per cent.

Whilst this is strong year-on-year performance in profits for Royal Mail, profits as a percentage of revenues (referred to as “return on sales” in the table above) of 3.96% is a little lower than the 4.80% for Deutsche Post, but clearly much lower than the 7.70% for Austria Post.

The lower return for Royal Mail can in part be attributed to the ongoing costs of transforming the business, against which Royal Mail charged £195 million in 2011/12.

Also, staff costs at Royal Mail are higher; in 2011/12 Royal Mail’s staff costs were higher as a proportion of revenues than its rivals. Royal Mail staff costs were 56% of revenues, compared to 32% for Deutsche Post, and 46% for Austria Post.

Financial Ratios

Measuring profits as a percentage of revenues is one measure of profitability, a private company will also be judged by the stock market by reference to the price-to-earnings (P/E) ratio.

The price-to-earnings (P/E) ratio is an indicator of a company’s perceived growth prospects according to the market. The P/E ratio of Royal Mail is only an estimate and should only be used as an approximate indicator. At this stage the P/E ratio for Royal Mail is significantly lower than other privatised European postal operators. The ratio for Royal Mail is 10.0, compared to 17.9 for Deutsche Post, and 19.7 for Austria Post. This suggests that, relative to its earnings, the market is not valuing Royal Mail as highly as its rivals. There are many reasons why this could be the case as the ratio is driven by market sentiment and not company performance.

At this stage such comparisons need to be viewed with considerable caution; it will not be possible to draw firmer conclusions on relative performance until there is a longer history of performance for the privatized Royal Mail.

Valuation of Royal Mail

Before Royal Mail stock began trading on the 11th of October 2013, the Labour party produced a report that claimed that by pricing the shares at £3.30p, the government were selling it off at significantly below the true market value.

The Labour analysis showed that the government had undervalued it by £1 billion (about 30%), whilst other city analysts have calculated that it had been undervalued by between £600 million and £2.7 billion (between 22% and 80%).

One of the key areas in which the Royal Mail was undervalued was the property portfolio of more than 2,000 locations across the United Kingdom, which was clearly badly undervalued at just £787 million. The Royal Mail sell-off prospectus lists several sites as beng surplus to requirements, including the 8 acre Mount Pleasant sorting office in Islington, which would be worth over a billion if sold for housing development. It is no surprise at all that the private company will be allowed to keep all of the profits from the sale of property assets that were paid for out of public funds, then flogged off on the cheap.

On the day of the stock market floatation, the share price immediately rose from £3.30p to £4.50p, before settling down at around £4.45p, indicating that the Labour party and the city analysts were right, the Royal Mail had just been sold off at massively below its market value.

In a fair world the incompetent (or brazenly corrupt) Tory and Liberal Democrat MPs that devised this ludicrous undervaluation would be jailed and the two political parties would be forced to stump up the difference between their absurd undervaluation and the real value of the Royal Mail estate. The problem is that we don't live in a fair world, and none of the people responsible for ripping off the public will ever be held to account for their actions.

There has been press reports that merchant banks, had suggested higher figures than the eventual offer price.

For example, on 18 October 2013, The Financial Times reported that
“At least two investment banks pitched a maximum price of about 500p at the beauty parade convened to select the underwriters to the offering. The shares were finally sold to investors at 330p. “

The Guardian reported on 8 November 2013 that
“It was revealed after the float that four investment banks – JP Morgan, Panmure Gordon, Deutsche and Citi – believed the Royal Mail was worth far more than the price achieved.
JP Morgan had suggested the business could be worth up to £10bn when it was pitching for the right to sell the Royal Mail earlier this year. Citi and Deutsche Bank had indicated a valuation of around £6.4bn-£7.3bn”.

Royal Mail: History and Background of privatization

The Royal Mail history gos back to the appointment of a "master of the posts" by Henry VIII. It was run purely as a means of establishment communication until Charles I made the service available to the public in 1635. The first designated Royal Mail coaches, featuring Royal Mail livery, appeared in the 18th Century, and in 1793 the Royal Mail Investigations Branch was established, making it the World's first recorded criminal investigations authority.

The first Royal Mail train, between Manchester and Liverpool, began service in 1830 and in 1838 the Postal Order was introduced. In 1839 the concept of pre-paid postage was introduced and this was quickly followed by the invention of the adhesive postage stamp in 1840. The fact that the postage stamp was invented in Britain is the reason that the Royal Mail postage stamp is the only one in the world which does not include the name of the country of origin.

The Post Office was responsible for the UK telephone network from 1912 (when it was established) until 1980 when the Tories hived off British Telecom as a separate company, in order to prime it for the privatisation that took place in 1984.

In 2012 the Royal Mail and the Post Office were divided into separate companies in order to facilitate the sell-off of The Royal Mail in October 2013. The Privatization has been planned for 20 years with the legislation enacted in 2011 to open the way for the sale. The reasons why Government is privatizing Royal Mail are the follow:

1. According to Government and Royal Management say the company needs access to private capital in order to grow and compete. 2. The Internet shopping boom make parcel delivery far more important to Royal Mail business than the delivery of letters , that’s why they need investment to revamp the business accordingly. 3. Also the government don’t want to invest large amounts of money at the time when it is trying to act public spending and borrowing.