ROYAL Mail’s investors should prepare for a decade of regulatory reviews, a leading analyst warned yesterday, after Ofcom launched a “fundamental” investigation into the privatised British postal service.
“[Telecoms company] BT gets reviewed all the time – this is how the world works for former government-owned monopolies,” said Shore Capital’s Martin Brown. “If you’re a Royal Mail shareholder you should get used to reviews and consultations for the next ten years from now on.”
The communications watchdog said the review was triggered by the recent withdrawal of Whistl from the “direct delivery” letters market, leaving Royal Mail with no national competition.
However, competition remains strong in other postal markets, Ofcom added, such as parcels and “access mail” – where operators collect and sort mail before handing over to Royal Mail to complete delivery.
Ofcom will consider whether Royal Mail’s wholesale and retail prices are appropriate, and could enforce price caps on its products and services.
Eighty per cent of Royal Mail services and products used to be charge controlled but in 2012 this was reduced to five per cent, to support the flailing postal service by giving it the power to raise its prices.
It is thought that now the company has recovered, Ofcom is considering whether it needs tighter regulation again. Second-class stamps are one of the few areas currently under a price cap, but first-class stamps are not.
Ofcom also plans to assess the efficiency of Royal Mail’s business model. It expects the review to be completed next year.
Royal Mail said it “will continue to participate fully in Ofcom’s review” and agreed that there is “a need for regulatory clarity and certainty for all market participants”.
Shares were down 2.5 per cent at 492p in early trading, but recovered to close 0.3 per cent higher at 506.5p.
Robin Byde, analyst at Cantor Fitzgerald, said the Ofcom review added a degree of uncertainty but the outcome was unlikely to have a negative effect on the company.
The government came under fire for pricing Royal Mail shares too cheaply when it floated the majority of its stake in 2013. It sold off a further 15 per cent last week for £750m and plans to sell the rest this year.
PROFILE: MOYA GREENE
As far as the City is concerned, Royal Mail’s Canadian boss Moya Greene can do no wrong. “You can’t criticise her performance throughout the privatisation and most investors seem happy,” Martin Brown, analyst at Shore Capital, told City A.M. That’s not to say there haven’t been a few blips along the way. Golden Greene had to shrug off criticism of a 13 per cent pay rise to £1.5m this year, after slashing thousands of jobs. It will be interesting to see how the ex-boss of Canada Post, who was reportedly known for growing profits through aggressive cost cuts, will shape Royal Mail once it is completely free from government ownership.