Royal Mail Plans Initial Public Offering Within Weeks

Royal Mail Group Ltd., the U.K.’s 360-year-old postal service, intends to hold an initial public offering of a majority stake “in the coming weeks” to help the company gain a competitive edge against European rivals.

The government announced plans for the sale today without offering an estimated value for Royal Mail. While the size of the stake will depend on market conditions, Business Minister Michael Fallon said the aim is to dispose of a majority.

The sale will be the largest U.K. privatization since then Prime Minister John Major broke up British Rail in the 1990s. The sell-off will be conducted with workers threatening to strike in protest.

Strike action “won’t stop the privatization process,” Fallon said in an interview on Bloomberg Television. “There is a very generous offer on the table for Royal Mail staff,” who are being offered an 8.6 percent pay increase over three years and 10 percent of the shares for free, he said.

One of the country’s biggest employers with 159,000 workers, Royal Mail has sought to adapt its letter-focused network to more lucrative package shipping in the face of competition from TNT NV of the Netherlands and Deutsche Post AG’s DHL Express. The IPO comes on the heels of a June listing of BPost SA, Belgium’s former postal monopoly.

“We are completing the third and final part of the reforms agreed by Parliament two years ago,” Business Secretary Vince Cable said in a statement. “This delivers on the commitment in the coalition agreement to give Royal Mail access to private capital.”

Stock Interest

Royal Mail could be valued at about 3 billion pounds ($4.7 billion) in the IPO, three people with knowledge of the matter told Bloomberg News last month. They asked not to be identified as details of the sale hadn’t been made public.

Landsdowne Partners and Standard Life Investments are among fund managers indicating interest in investing in the postal service, Sky reported Sept. 9.

Royal Mail will today replace its outstanding loans from the government with credit facilities from its banking syndicate, made up of a 600 million-pound term loan and an 800 million-pound revolving credit facility.

Retail buyers will be able to apply for a stake, with a minimum investment of 750 pounds. The government hasn’t said whether retail investors will receive a discount. The minimum stake for employees who want to buy in will be 500 pounds.

Different Approach

The decision to make shares available to retail buyers and institutions on the same basis contrasts with the privatizations of the 1980s -- such as British Gas and British Telecom -- when stock sales were aimed primarily at the public in a concerted effort to broaden share ownership. An advertising campaign accompanying the sale will also be muted.

“Privatization is the worst way to access to capital as it’s more expensive than borrowing under public ownership,” the Communication Workers Union said today in a statement. The effort is “about vested interest of government ministers’ mates in the City,” the CWU said, referring to London’s financial district.

Plans to sell Royal Mail “are a betrayal of the British public,” the majority of whom oppose the action, the union said. “Privatization would put jobs and services at risk and lead to higher prices.”

The sale will raise money for modernization including increased automation, Fallon said in the interview. “Royal Mail needs to be able to seize the opportunity” of the surge in package delivery because of online shopping, he said.

IPO volumes in the region have tripled this year. Issuers in Europe, the Middle East and Africa raised about $15 billion in primary share sales this year, compared with $5 billion in the same period in 2012, data compiled by Bloomberg show. Deutsche Bank AG is ranked first in managing the sales.

UBS AG, Goldman Sachs Group Inc., Barclays Plc and Bank of America Merrill Lynch are among banks mandated for the Royal Mail sale. Lazard & Co. Ltd. is advising the government.

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