Royal Mail warned yesterday that an Ofcom review into wholesale mail prices will mean a period of uncertainty.
This morning, shares in the FTSE 100 firm have fallen to 502p - down nearly three per cent.
The investigation will look at Access market contract charges - Access mail is the type that’s pre-sorted, before being delivered by Royal Mail.
Access volumes accounted for about 55 per cent of the UK letter market last year, generating £1.5bn of revenue.
But post competition is heating up, and Access is the main battleground between Royal Mail and TNT, the rival parcel delivery service owned by Dutch Post Office.
TNT has around 50 per cent of the market share, but is unlikely to ever have complete national coverage, so will need to continue using Royal Mail, to some degree, to deliver letters, explained UBS in a note this morning.
It is, however, already accelerating the pace of its direct delivery roll-out across the UK, having recently secured investment from Lloyd’s Bank’s private equity arm, LDC.
Cantor Fitzgerald warns that this is potentially a “major threat to Royal Mail, as it would lose 100 per cent of revenues relating to lost contracts.”
It says the increases to Access charges and demand for more forecast data on volumes from third-party operators is a move by Royal Mail to defend its revenues.
Ofcom’s investigation into the proposals on charges follows a complaint made by TNT back in February. The regulator could block or make changes to charge increases, and the demand for more data.
UBS has expressed its concern over the situation, saying “we do not believe it is the case that Royal Mail has done anything wrong but rather it is clear the market is changing.” It added that expecting parties to agree is “overly optimistic”.
A growing problem
Meanwhile, Cantor paints an even warier picture: "In our view, this is potentially a nasty battle between Ofcom, Royal Mail and TNT Post on Access mail, direct delivery services etc."
It calls the “threat” from TNT to Royal Mail’s revenues “clear”: “This is a small story for the moment but will gather momentum in the next 12 months.”
UBS has a sell valuation on stock, with a price target of 450p. Cantor also recommends sell, with the slightly higher target price of 500p. Royal Mail has a market cap of £5.26bn.