Selling the Royal Mail

Abstract

In October 2013, the Royal Mail (RM) was sold by the UK government through a public share offering. This was the largest privatization by value since the 1990s. The RM is facing competition in its core letters and parcels businesses and the coalition government concluded that its future best lay in the private sector with access to the private capital market. This study contrasts this privatization with large privatizations in the 1980s and 1990s. Significant differences are identified in terms of post-privatization gains to investors, the attitude towards marketing of the shares to the public, the preferential share scheme for employees and the treatment of pension liabilities. This privatization is shown to be particularly poor value for money for British taxpayers.

Keywords:

• Employee share scheme
• pensions
• privatization, Royal Mail
• share flotation

Notes

*The business is regulated by Ofcom under the provisions of the Postal Services Act 2011. Ofcom regulates RM's conformance with the universal service obligation, some charges and access to inward mail centres by other mail service providers. The secretary of state for business, innovation and skills holds regulatory powers relating to maintaining the universal service obligation. The share of RM revenues regulated has shrunk in recent years due to the opening up of postal services to competition. In 2011, approximately 60% of the RM's revenues were subject to direct price control, compared to just 5% at privatization (mainly consisting of a price cap on second class letters, large letters and parcels weighing up to 2kg).

*The retail offer comprised of an Intermediaries Offer (through brokers) and a Direct Retail Offer (purchase of shares by post or the dedicated website).

**The demand for the shares was 24 times the maximum number of shares on offer to institutional investors.

*Part-time staff received a pro-rata allocation based on hours worked between 10 July 2013 and 13 October 2013 (RM, 2013, p. 81). The employee shares under the RM scheme are held in trust under the Royal Mail Share Incentive Plan so that income tax and national insurance contributions on the value of the shares are avoided.

**There was a cap on the value of the shares that could be allocated under the free share scheme to individual employees of £3,000. This meets the requirements of tax legislation. Any remaining shares set aside for employees were to be awarded, as far as practicable, as free shares on or after 6 April 2014, i.e. in the next tax year. Employees could elect to opt out of the free offer. There was an overall limit on the number of shares set aside for the priority offer, of 10% of the total shares allocated to the retail offer.

*The NAO (2014, paras. 2.12–2.14) suggested that the share pricing may have been affected in the latter stages by the possibility that the US government might breach its debt ceilings. At the time, the president and congress were unable to agree on a future budget for taxes and spending.