Royal Mail’s privatisation, 10 years on

Nearly 10 years ago, the bulk of Royal Mail was privatised, with the process being completed two years later, in October 2015. But the odds are good that if you bought into the privatisation process, you did so during that first sale, in October 2013.

Royal Mail Group — as it then was — is now called International Distributions Services (LSE: IDS), reflecting the twin planks of its business: a UK postal service, and an international parcels and logistics services business. Okay, it’s a more accurate description, but unkind souls – like me – might suspect another motive for the rebranding. Royal Mail hasn’t exactly been a success story since privatisation.

And you may have noticed that on 12 May, the board of International Distributions Services issued a much-heralded regulatory news item: Royal Mail’s chief executive — i.e. the CEO of the UK postal arm piece of the business — was stepping down, after two years in the role.
 
According to an article on the BBC news website, senior leadership at International Distributions Services are believed to have “wanted fresh leadership at the firm”.

It can’t go wrong

Let’s go back to that October 2013 privatisation for a moment. As a potential investment, I remember being an enthusiastic fan of the idea. I wasn’t alone: the offer was significantly oversubscribed.
 
One guy I know put in for £10,000 worth. But he — and other would-be investors who put in for a large number of shares — were allocated the same amount of shares as everybody else: 292 shares, at 330 pence per share.
 
£963.60 worth of shares, in other words.
 
Yet the logic behind putting in for more was compelling. You could see why people felt the offer to be an attractive one.

Pretty much a monopoly on UK postal deliveries. Huge amounts of surplus land and buildings, much of it in prime urban locations. After years of relative under-investment, significant potential for efficiency savings. Seemingly obvious potential for manpower reductions.
 
And so on, and so on. In short, Royal Mail was just about as close to being a no-brainer as it’s possible to get.

A negative total return??

So how did it all turn out?
 
Fortunately, one doesn’t have to do much digging to find out. There’s a handy total return chart on International Distributions Services’ investor website.
 
Hold your mouse over the bar chart columns, and it provides the exact numbers, with no need to interpolate from the chart. And over the 10 years since privatisation, there’s been a negative total return of 18.9%. But hey, let’s not complain too loudly: over five years, there was a negative total return of just over 51.5%.
 
And these are International Distributions Services’ own numbers, don’t forget.
 
Meanwhile, how’s the share price doing? Well, it closed at 228 pence when I wrote this. Privatisation 10 years ago, you’ll recall, was at the supposedly bargain price of 330 pence — 45% higher than today’s 228 pence.

After ten years, that is simply awful. Royal Mail’s management have achieved a rare thing: a privatisation that does badly for investors.

Foot! Ready! Aim! Fire!

What went wrong at Royal Mail? A simpler question to ask might be, what went right? The answer: not much.
 
And the bad news headlines continue to rack up. Earlier this year, international mail was suspended for over a month, thanks to a ransomware attack that was apparently linked to Russian criminals.
 
Today, as I write these words, comes news that Ofcom is to investigate why Royal Mail has failed to meet its 94% target for delivering First Class mail within a day — that’s those letters for which we all pay a whopping £1.10 to post. Royal Mail’s actual performance: 74%.
 
But these are just distractions. The real own goal has been a multi-year adversarial approach to industrial relations that in the past year has seen a succession of postal strikes, a £200 million loss of revenue, and minimal progress towards long-sought efficiency improvements.
 
Asset sales? There may have been some, but — as we see from that disastrous negative total return performance — any good that they have delivered has been dwarfed by everything else.

Opportunities missed

What to do?
 
I bought in at privatisation; bought more (at a slightly higher price) five years later, and bought still more in 2019. Overall, I’m down just 23%, thanks to buying that tranche of shares in 2019. I’m not going to sell, while the dividends keep flowing.
 
And I still see the same investment thesis that I saw 10 years ago, in 2013. There’s a lot of potential value waiting to be unlocked.
 
What I don’t see is a management that has shown any real aptitude in unlocking that value. And I don’t really see an industrial relations environment where the necessary discussions will prosper.
 
Postal unions were vociferous in calling for the chief executive’s departure, but can they be counted on to work any more productively with his successor? I don’t know.
 
Meanwhile, on a P/E of under 4, the shares offer a 6% yield, for those who can stomach the ride.