The BBC reported this morning that the initial price for Royal Mail shares will be 330p valuing the company at £330bn. The Government will sell 52.5% of the company generating £1.7bn for the Treasury.
Despite the share price of 330p being at the top of the range indicated it is likely that the level of demand for the shares when combined with the limited supply will create something of a free giveaway when the shares begin full trading on Tuesday. Commentators suggest that shares could reach 400p or over, theoretically creating a healthy 20% profit.
So why wouldn't anyone with funds languishing in savings accounts and being eroded by inflation take a risk and buy into this offer? Well I won't and there are several reasons why.
Moving from the public to the private sector can be painful for any company but Royal Mail with its 150,000 employees is a labour intensive, people led business. A fact of which the CWU who have been campaigning against the "Great Mail Robbery" are extremely well aware.
The CWU is set to announce the results of a strike ballot on October 16th with the possibility of industrial action if they get a "Yes" result as they would like as early as the 23rd. The purpose of this industrial action? To quote their website "We want an agreement that means, regardless of who owns the company, that your job and terms and conditions are protected."
This is not the real world. Parcel delivery is a highly competitive business that operates on very small margins and Royal Mail has both benefited from and been the victim of the internet as it has increased parcel volume but reduced the use of the mail. To have a future it has to compete with the likes of UK Mail and courier delivery companies such as Hermes and this means that there can't be anything that isn't open to negotiation.
The Chief Executive, Moya Greene has done an excellent job in the last few years of limiting the number of days lost due to industrial action but Royal Mail has already warned the Business Select Committee that "the company will employ fewer people in the future, whoever owns it". Given the attitude of the CWU isn't a return to the level of strike action seen in 2008 and 2009 more likely?
There are a couple of other things worth worrying about: the first is to understand what claim the pension fund, which is in the hands of the Government, has on the business and its assets. The second is that, like most state owned enterprises, the infrastructure has been heavily under invested in. To reorganise and upgrade its sorting equipment is likely to take at least 3 - 5 years.
The employees of Royal Mail are certainly looking to cash in with The Telegraph reporting that "just 368 out of 150,000 employees turned down the share offer". No trace of hypocrisy there then if the CWU are to be believed when they say that "most staff are still against privatisation".
Let's hope that the business can be saved with more investment, but it is likely to be an uphill struggle given the attitude of the current workforce. There is a real risk that the CWU will materially damage any prospect of success and if the image above (taken from their website) is anything to go by then they will certainly do so.
Written by Erica Vilkauls: Director JEM Retail Consultants.