No money in post, so why was Royal Mail a good buy?

No more reindeer? Andrew Milligan/PA

Royal Mail has been privatised. Even after Margaret Thatcher’s frenzy in the 1980s, it was one of the last UK public enterprises left; now, the coalition government has sold 52% of Royal Mail. Whereas Thatcher’s push for privatisation was mainly driven by ideology, this latest one was principally fuelled by fiscal opportunism.

The sell-off was a success, with the initial public offering eight times oversubscribed. But postal services are not generally great business propositions these days and the privatisation of state-owned operators is the exception, not the rule.

So what exactly is it that makes Royal Mail such an attractive investment? Here’s a hint – it’s not delivering letters or parcels.

Privatisation elsewhere

The first privatised national postal operator in the world – and the only fully privatised one – is the Dutch postal service, whose transition to a private entity is a complicated story. The then-joint Dutch Post and Telecom Service (called KPN) was floated on the stock market in 1994; in 1996, it bought the private Australian integrator TNT in a friendly takeover. The service was then separated into post and telecoms in 1998. Post was still majority-owned by the Dutch government; it was renamed TPG in 1998, then re-branded as TNT in 2005 and fully privatised in 2006.

But despite its early mover advantage, the postal business was not a success for TNT. Its shareholders first decided to sell the parcels unit, then split the remaining company into TNT (international express) and NLPost (national mail service) in 2011.

This extended privatising process has been a disaster. The Dutch have been forced to accept numerous concessions in the provision of postal outlets, frequency of delivery and more besides in order to have a national postal service at all.

By comparison, the privatisation of the German service has been far more successful. In 1989, the old Deutsche Bundespost was split into three separate companies: postal service, telecoms and the postal bank. While Deutsche Telekom and Postbank were privatised, Deutsche Post remained in government ownership. Substantially helped by the German government, it used hidden subsidies to go on a global shopping spree, especially in Eastern Europe. In 1998 it began acquiring the parcels operator DHL, gaining majority ownership in 2001.

The government gradually sold off its shares in Deutsche Post, and by 2005 the majority were in private hands. Today, the German government holds approximately 30% of the company. Thanks to continued government support and its global acquisitions, the partially privatised Deutsche Post DHL has become the world’s biggest and most successful logistics operator.

Yet the successful partial privatisation of Deutsche Post/DHL cannot be replicated, neither by Royal Mail nor by anyone else – and few countries have even tried in earnest. Japan Post, despite numerous announcements, has yet to sell a single share after years of political squabbling; Singapore Post, the “fully privatised” postal operator, remains owned by the government’s sovereign fund.

In fact, beyond Germany, there are only two real examples of partial privatisation: Austria Post and Belgian Post (called bPost). However, both are still majority owned by their respective governments, which remain wary of letting fully privatised operators run their services.

Decline and fall?

Privatisation pays off: Deutsche Post DHL is the world’s largest parcels courier. Bill Abbott

The future for postal operators worldwide does not look good. Traditional letter mail is being replaced by electronic mail at annual rates ranging from 2%-3% (on average in Europe) to up to 10% (Scandinavia); in 2012, the US Postal Service (USPS) ran a record deficit of $15.9 billion (£10 billion).

And even though the parcel market is still growing thanks to electronic commerce, few national postal operators are actually capable of taking advantage of this opportunity. The parcel business is truly global, but it primarily benefits big multinationals - among them DHL (Germany), Fedex (USA), UPS (USA) and DPD (France) - and not national operators.

So at a time like this, and given postal privatisation’s very chequered history, why was the privatisation of Royal Mail such a success for investors? The answer may actually be quite simple: like any long-established postal operator, Royal Mail owns a great deal of real estate in prime city centre locations. Assets like these can easily be sold off now that the mail business is declining and local customers rarely visit a post office.

So the success of the Royal Mail sell-off might simply be another indicator - albeit a rather paradoxical one - of traditional mail’s apparently terminal decline.