Royal Mail finding it harder to deliver

A few more layers of froth were blown off the Royal Mail share price yesterday following the postal group's warning that its key parcels division is performing below expectations.

Priced at 330p in the group’s controversial privatisation last October, the shares rose rapidly to top 600p, sparking furious accusations that the government had sold the business on the cheap.

Business secretary Vince Cable has repeatedly insisted that Royal Mail was priced appropriately, dismissing the soaring share price as “froth”. The shares certainly looked less frothy yesterday as they tumbled more than 3 per cent on chief executive Moya Greene’s downbeat assessment of prospects for its crucial parcels business. The fall took the shares to 450p, a long way short of their peak but comfortably ahead of the float price.

By pressing ahead with a price of 330p, the government is estimated to have cost taxpayers around £1 billion in lost float proceeds. Critics of the privatisation are particularly angry that the bulk of the institutions that were given privileged status in the float raked in huge profits by swiftly offloading their stakes. Many small investors, on the other hand, have held on to their shares.

Nine months ago, when institutions and private shareholders were being urged to buy into the business, Royal Mail outlined a rosy-sounding scenario for the parcels side, which accounts for the bulk of the group’s revenues. The business was, it said, “well positioned” to benefit further from predicted levels of growth in the UK parcel market.

Competitive

Now, however, it seems the already competitive market has got even tougher thanks to a move by Amazon to build up its own delivery network. Royal Mail has additionally been hit by Amazon’s move in January to scrap free super-saver delivery for customers on orders below £10, which has hit volumes.

As well as a fleet of its own vans, Amazon is installing collection lockers for customers at London tube stations and has signed up a number of retailers to its collection network.

Greene said the group was working on a number of moves to boost parcel revenues, including longer opening hours at the weekend to receive goods from e-retailers, and a Sunday delivery service for online shoppers. The benefits of these moves are expected in the second half but she cautions that the group’s full-year performance would be heavily dependent on how busy a Christmas it has.

Outside the UK, Royal Mail is also facing problems with parcels. Last week it warned that competition authorities in France were investigating possible antitrust law breaches by its French arm GLS. If proven, there will be fines to pay, and while the group said it did not know how much these might be it warned that they could be “material”.

The timing of the disappointing trading update from Royal Mail is tricky for the group, coming just days ahead of its first-ever annual meeting. Greene is expected to face flak from the group’s new shareholders over her £1.35 million pay package, not to mention the performance of the parcels business.

Shareholder activists

Royal Mail chairman Donald Brydon is also being targeted by shareholder activists because he is chair of another FTSE 100 company, the software group Sage. The lobby group PIRC (Pensions Investment Research Consultants) is opposing his reappointment at Royal Mail because it says he does not have enough time to devote to key roles at two companies.

PIRC is also advising Royal Mail shareholders at tomorrow’s meeting to cast their votes against the group’s three-year incentive plan, which it says could be open to manipulation. Fiona Walsh is business editor of theguardian.com