Royal Mail sale to Czech billionaire - why not blocked?

[skwdenyer]

I may be daft, but why on Earth isn’t the Govt blocking the sale of Royal Mail?

I realise it is now (insanely) a private company, but it is surely a core British asset. Can you imagine the USA privatising the USPS and then allowing a foreign billionaire to buy it?

So far the buyer has made *time limited* assurances to keep the headquarters and tax base in the UK; the Government appears to have applied no binding conditions.

If you believe in Brexit and “taking back control” - or even if you don’t - it is hard to imagine a more blatant example of so much that is wrong with the UK right now.

Or am I just out of step? I can see the merits in some private ownership to secure capital. DHL is a good example of that (being the privatised German postal service). But the German government retained a quarter share, and there’s no chance whatsoever it’s HQ or tax base are at risk of being offshored.

[skwdenyer]

DeejRC said:

I’m genuinely staggered that anybody would wish to buy it!
I’m also genuinely staggered that anybody would consider it a core National strategic interest in the 21st C.

A universal flat-rate mail service is a critical piece of infrastructure, without which large swathes of stuff stops working.

That one can leverage that infrastructure to feed the currently-insatiable demand for parcel deliveries is a huge advantage. I mentioned DHL for a reason - the Deutsche Poste was parlayed into a world-leading, massively-profitable international mail and parcel operation.

The failure to understand what was there is why it was flogged off in the first place...

[skwdenyer]

Yabu said:

skwdenyer said:

I may be daft, but why on Earth isn’t the Govt blocking the sale of Royal Mail?

I realise it is now (insanely) a private company, but it is surely a core British asset. Can you imagine the USA privatising the USPS and then allowing a foreign billionaire to buy it?

Government may be dropping the ball, whilst I assume incompetence in most cases with them I do wonder if they would be happy in this case to be rid of the future liabilities of Royal Mail- I’m not sure what financial position it’s in currently, seem to remember it being in news years ago with poor finances years ago, has that all been resolved?
What’s the actual financial state of Royal Mail is looking into the future?

What assets has Royal Mail got? What liabilities does it have? Pension liabilities? What’s the work place/corporate culture like there now? Financial outlook? What’s the financial situation been there the last few years? If you looked into those you could probably come to a few conclusions about the viability of Royal Mail going forward.

Royal Mail made sense to me years ago, post office, letter delivery and parcel force but now the post office is its own thing and neither it or letters are used in the volume they once were and parcel delivery is competitive for custom.

Phone bill, utilities, car insurance, etc , etc are all email/paperless now, most of what Royal Mail delivers now is junk mail, the cost of stamps to send a letter via the post isn’t that cheap either.

Edited by Yabu on Wednesday 26th June 06:35

When the Government "sold" the Royal Mail (by a float) in 2013, the Government took over the RM pension scheme. The potential liability then was £38bn, which has now grow to over £50bn.

The Government also got the pension fund's assets. Then-Chancellor George Osborne used those assets to reduce Government's short-term debt - which netted £17bn. A lot of those assets were gilts, which were just given back to the Treasury for free, creating a loss of £11bn.

So was the privatisation massively profitable for the taxpayer? Of course not. All that sleight-of-hand over the pension was used to generate less than £2bn in initial sale proceeds.

Even better, about a third of the float shares were pre-sold on preferential terms to hedge funds, who flipped them for almost double what they paid for them in days.

The ultimate proceeds from privatisation were £3.3bn or so. RM has been paying out dividends. Kretinsky is borrowing £2.3bn to part-fund the acquisition, saddling the business with enormous requirements to service his debts. This is on top of the business' existing £1.7bn - which include £1.4bn of bonds with potential pay-on-change-of-control requirements.

The magic of course is in the property assets. RM owned 1000 freeholds and 1000 leasholds at flotation. It has sold quite a few off, and banked big profits - and paid them out. It is hard to know what they're really worth, because they're carried at historic cost on the balance sheet.

And how big were those dividends? By 2018, RM had paid out over £1bn in dividends. That's money the taxpayer could have had "for free." The return for investors has been terrific - to get back 33% of your stake in 5 years, and still to own the underlying asset, is a pretty nice return. Especially when the cash to pay those dividends came from debt, which the future business has to service (currently about £100m pa).

The failure of the public to understand the big picture of the sell-off of national assets and, even now, to misunderstand what value is in the business, is really quite extraordinary. Once the takeover is complete, expect to see asset sales to "related" parties at prices which turn out to be rather low, followed by a destruction of the business...

[skwdenyer]

eldar said:

skwdenyer said:

A universal flat-rate mail service is a critical piece of infrastructure, without which large swathes of stuff stops working.

That one can leverage that infrastructure to feed the currently-insatiable demand for parcel deliveries is a huge advantage. I mentioned DHL for a reason - the Deutsche Poste was parlayed into a world-leading, massively-profitable international mail and parcel operation.

The failure to understand what was there is why it was flogged off in the first place...

A universal flat-rate mail service is a critical piece of infrastructure, without which large swathes of stuff stops working.

Examples of the stuff that will stop working?

The legal system. Anything that relies upon service of things reliably - benefits, taxes, criminal and civil cases, driving licences. We have actual laws - and vast precedent - around the effect of sending a letter, when it is sent, when it is deemed received, and so on. You might find doing stuff by email more convenient, but the law doesn’t recognise that as automatically valid (and shouldn’t do IMHO).

Email isn’t always reliable. Google’s spam algorithm may dump stuff (other mail providers are available). And it isn’t obvious that forcing digital switchover to everyone for all things is a useful or valid approach.

Besides, despite the naysayers, delivering stuff isn’t going away. It is beyond credibility that a well-managed RM would have allowed a situation to arise in which in my village we get Amazon drivers coming from 50 miles away, daily, to deliver £4 items. It is mad - and maddening - that the universal mail service can’t undercut that sort of operation.

If we don’t want to ring fence RM, we should IMHO damn well force every other mail-like provider to offer the same flat rate pricing for the whole of the UK.

[skwdenyer]

isaldiri said:

How do you get the pension liability now as over £50b? it is a fixed pool of liabilities that isn't increasing as people are not joining anymore and pension liabilities increase as a function of discount factor decreasing. long term yields are massively higher now than in 2013.

From the horse's mouth at https://assets.publishing.service.gov.uk/media/62d...

Cabinet Office said:

The total pension liability at 31 March 2022 is £50.9 billion (31 March 2021: £48.6 billion). This relates to benefits accrued before 2012 for qualifying members, and their beneficiaries, of the RMPP as at 31 March 2022.

[skwdenyer]

isaldiri said:

skwdenyer said:

isaldiri said:

How do you get the pension liability now as over £50b? it is a fixed pool of liabilities that isn't increasing as people are not joining anymore and pension liabilities increase as a function of discount factor decreasing. long term yields are massively higher now than in 2013.

From the horse's mouth at https://assets.publishing.service.gov.uk/media/62d...

Cabinet Office said:

The total pension liability at 31 March 2022 is £50.9 billion (31 March 2021: £48.6 billion). This relates to benefits accrued before 2012 for qualifying members, and their beneficiaries, of the RMPP as at 31 March 2022.

From the horse's mouth indeed. It cannot have escaped your notice that rates now are a hell of a lot higher than 31 march 2022 which is over 2 years ago so it's a little odd you missed this rather more recent report which notes that the liability as of 31 march 2023 (with rates again rather closer to current I might add and far more relevant than march 2022) is £29.9 billion.

https://www.gov.uk/government/publications/royal-m...

The value of future liabilities can go up as well as down

My larger point was that the Government assumed enormous liabilities and left the private sector with a profitable asset for a cheap price. Again.

Nothing has been done to RM in the private sector that couldn’t have been done with it in state ownership. There was no obvious or rational reason (beyond destructive dogma) to just flog it off in its entirety.

[skwdenyer]

isaldiri said:

skwdenyer said:

The value of future liabilities can go up as well as down

My larger point was that the Government assumed enormous liabilities and left the private sector with a profitable asset for a cheap price. Again.

Nothing has been done to RM in the private sector that couldn’t have been done with it in state ownership. There was no obvious or rational reason (beyond destructive dogma) to just flog it off in its entirety.

Hold on a second - you had said earlier 'the potential liabilities have now grown to £50b'. That was manifestly incorrect and you absolutely did not caveat it with your latest blurb about liabilities going up or down. You just blanket chucked out an accusation about a profligate government that had saddled the taxpayer with a massive liability when it was actually a smaller one than at inception which you chose to ignore because it wouldn't suit your rant

Your larger point about the government assuming very large liabilities was, as I said, addressed by the previous labour government report on the issue which had said a write off of 9-10b was going to be required. Osborne a few years later doing so for a net liability of 12b was entirely in line with that.

Also, you did not address the fact that the royal mail was puking money and the government was going to have to raise cash for it to continue being functional. As government spending was already constrained, finding a way to flog it off that raised some immediate cash instead rather than diverting more money needed for more important government spending to prop up what was a non-critical asset was not entirely as irrational as you suggest. What departmental spending do you think should have been cut back in order to find the operational losses plus extra capital the royal mail was requiring in order to be kept if you're convinced that it should have remained in state ownership?

As regards the £50bn, I was simply using a report that was mis-dated as my guide. It is true that liabilities did reach £50bn. It is also true they could reach £50bn again. Yes, they've dropped back again now, but as we all know valuations of future liabilities are based upon a number of factors. Even if today's number is the same or lower than at inception, it is still an enormous one.

You keep mentioning the Labour report as if you think I'm making a party political point. I'm not. I did not support privatisation by any government of whatever hue.

Royal Mail has thrown off buckets of cash since privatisation (in round terms, something like 60% of borrowings have been used to pay dividends), which appears inconsistent with your suggestion that it was somehow a basket case. It is inconsistent with the facts in evidence. The taxpayer would be far better off had RM not been privatised IMHO.

[skwdenyer]

Hill92 said:

The pension situation is more complex than just assuming the net pension liability at the time of privatisation. Successive governments contributed to the net liability over the years: from swapping the pension assets for notional IOUs in the 1970s to 1990s tax rules that limited pension assets to 110% of pension liabilities while simultaneously using Royal Mail as a cash cow for Treasury coffers.

That last point also contributed to the failure invest in modernisation in public ownership. The Treasury set ever increasing negative External Financing Limits which required Royal Mail to hand over cash regardless of business needs or even profits to support the payments. Even as the letter business continued to decline there was still government interference in attempts to modernise the business. It's one of those businesses that really cannot afford to be managed by whatever wins/loses the most votes for a government minister.

As regards Government direction, the approach taken with POL - holding shares through an executive agency - seems the most sensible, and doubtless would have been pursued had RM remained in public ownership. In such a structure, RM could have accessed private borrowing had it been necessary.

RM was capable of throwing off cash. You've mentioned the negative external financing limit. What is widely missed is that, in the run up to privatisation, Govt extracted a promise from RM's board to declare a £133m first-year dividend so the shares could be priced on a dividend yiield basis - of 8%! Govt routinely took money out of RM, and then lent it back - just like a PE firm! £1.3bn was agreed in 2010 for modernisation.

I'm not saying RM didn't need help, or that it had suffered under direct Govt control. I'm saying that immediate post-privatisation history shows that RM was capable of generating large amounts of cash *for shareholders* which could just as easily have been returned to Govt (or, better yet, retained in the business for investment purposes).

[skwdenyer]

Hill92 said:

skwdenyer said:

Hill92 said:

The pension situation is more complex than just assuming the net pension liability at the time of privatisation. Successive governments contributed to the net liability over the years: from swapping the pension assets for notional IOUs in the 1970s to 1990s tax rules that limited pension assets to 110% of pension liabilities while simultaneously using Royal Mail as a cash cow for Treasury coffers.

That last point also contributed to the failure invest in modernisation in public ownership. The Treasury set ever increasing negative External Financing Limits which required Royal Mail to hand over cash regardless of business needs or even profits to support the payments. Even as the letter business continued to decline there was still government interference in attempts to modernise the business. It's one of those businesses that really cannot afford to be managed by whatever wins/loses the most votes for a government minister.

As regards Government direction, the approach taken with POL - holding shares through an executive agency - seems the most sensible, and doubtless would have been pursued had RM remained in public ownership. In such a structure, RM could have accessed private borrowing had it been necessary.

The General Post Office was a department of state until the Post Office Act 1969 turned it into a statutory corporation. Post Office Counters Limited was incorporated as a subsidiary under the Companies Act in 1987. Royal Mail ceased to be a statutory corporation when it was reincorporated as Consignia plc in 2001. Both businesses were being run as companies owned by the government long before privatisation.

They couldn't just borrow externally under public ownership because any borrowings would be treated as part of the public sector net debt. And the Treasury has always had more pressing ways to allocate its self-imposed PSND funding limits.

HM Government has never been a benevolent shareholder in Royal Mail.

As we've seen, they didn't need to borrow. They paid out cash to HMG, then had to beg for funding from HMG. They had/have enormous under-utilised property assets. And there was nothing to stop JVs, partial privatisation (the DHL model), and so on.