Irish residents were not allowed to buy shares in Deutsche Post when about 29 per cent of the company was floated last Monday. Yet the events in Germany were highly relevant to the future of the Republic's postal business.

Trends that will have a profound impact on An Post lie behind what was one of Europe's largest flotations this year.

It is probably of little importance, then, that Deutsche Post shares increased only marginally in the initial public offering. The German group ranks among the most advanced postal businesses in the world. Valued at €23.4 billion, it has a large international spread and aims to grow strongly - both in the EU, where further deregulation of postal markets is likely, and beyond.

Internationalisation and deregulation are the issues facing An Post, whose business is valued at about £150 million (€190 million). The company has no plans to float on the stock exchange but faces challenges as competition from bigger, fitter players becomes a reality.

There are opportunities amid the threats. Yet An Post's chief executive, Mr John Hynes, must tread carefully to maximise benefits to a fragile business whose profit margins, he has said, are "totally inadequate".

The challenges derive from possible changes to the very ownership of An Post, and to individual elements of its business.

At the most fundamental level, An Post was sanctioned last year by the Minister for Public Enterprise, Ms O'Rourke, to seek a strategic alliance with a larger player.

According to one informed source, the most likely partners include either the German company or its Dutch counterpart TNT Post Groep which is also publicly quoted.

The source said there had been contact with Britain's Post Office, but that company was seen more as a competitor than a partner at this stage.

Still, Mr Hynes earlier this year cited An Post's strong trading links with the British company and said it was "very high" on its list.

A spokesman for An Post would not reveal which parties the company was speaking to.

He said: "The position is that there has been approval from the Government to examine the possibility. We're doing that." A decision was expected early in the new year, he added.

Spokesmen for Deutsche Post and the Post Office declined to comment on what they described as speculation.

These companies, in addition to the Dutch operator and France's La Poste, are seen as the potential victors in an eventual shake-out of the industry in Europe.

Such a development is seen as the natural outworking of a process that has seen postal businesses gradually separated from the telecoms sector, which was deregulated earlier and moves faster.

Linking up with one of the big players in advance of the endgame would have obvious advantages for An Post, although Mr Hynes has said he believes there is only a 50 per cent possibility of concluding a deal.

Still, few believe the company's long-term position could be secured by going it alone, which is the alternative strategy mooted by Mr Hynes.

Firstly, An Post could be vulnerable to a takeover as the Europe-wide industry consolidates. Secondly, it could generate much-needed efficiencies taking a partner.

It already faces competition in the lucrative parcels business from Deutsche Post, TNT and the Post Office - among others.

An Post's big advantage as a potential partner is that 30 per cent of the mail it handles is sent outside the State - this contrasts with a European average of 7-10 per cent.

Additional costs are associated with this business - but the tariffs are higher too. A large partner with a global business could make bottom line gains in this business.

Potential partners will be keenly aware, however, of the bulky internal structures at An Post, which lead to poor profit margins.

Strategic partnership agreements have drawbacks too. As Eircom's long-suffering shareholders know well, partners are inclined to put their own interests before those of the alliance.

For example, the decision by KPN and Telia to offload their 35 per cent stake in Eircom might have seemed perfectly rational in the remorseless atmosphere of the public markets, but it ignored the interests of co-shareholders, whose investments diminished when KPN and Telia decided to opt out.

Yet no matter how An Post views the pace of deregulation in Europe, opting out is not a possibility.

The most immediate threat to the company's day-to-day revenues is a proposal by the EU's Internal Market Commissioner, Mr Frederik Bolkestein, to reduce the scope of the postal monopoly from January 2003.

Mr Bolkestein wants the reserved area to apply to letters weighing 50 grams and 2.5 times the standard tariff - down from the present reserved area for letters weighing up to 350 grams and five times the standard tariff.

Another source familiar with the situation said the company lobbied MEPs this week seeking a staggered reduction of the monopoly to 150 grams and four times the standard tarrif.

This compromise, supported by other European companies, would subject £25 million of An Post's revenues to competition - significantly less than the £130 million that would be affected under Mr Bolkestein's proposal.

Mr Hynes claimed earlier this year that the plan could open 45 per cent of An Post's mail business to competition, against an average in the EU, where volumes of foreign mail are less significant, of 30 per cent.

The proposal will be subject to a vote of the EU Council of Ministers next month.

An Post's vulnerability to such change derives from its poor profit margins. Despite revenues of £424 million last year it reported pre-tax profits of only £11.7 million.

Such figures prompted the company earlier this year to seek annual savings of £27 million in a transformation process linked to a shareholding package that will grant 14.5 per cent of its stock to its 8,500 staff.

There are other issues. An Post secured a 10-year contract early this year to sell savings bonds and certificates for the National Treasury Management Agency.

But other revenue drivers may yet come under threat. The most significant of these is its contract to process social welfare payments, worth £35 million annually.

A Government decision not to put this to tender is the subject of a complaint taken by the Irish subsidiary of a US firm, Transaction National Services, with the competition and procurement authorities in Europe.

An Post may also face difficult discussions with the Department of Arts, Heritage, Culture and Islands on its contract to process television licence fees.

Worth £75 million this year, the contract's value is calculated on a percentage basis. RTE, which faces losses this year and next, has applied for a £50 increase to £120 in the licence fee. It is reasonable to expect An Post to seek an increase if a rise in the licence fee is granted.

Further questions surround the future of the rural post office network. An Post makes no secret that it regards many of the smaller outlets as uneconomic. The company has engaged in "urgent discussions" on the "sustainable development" of the network, although the outcome is uncertain as yet. The issue is highly sensitive, politically.

Separately, the company is believed to be near agreement with the State's largest commercial banks to manage a bill-payment business - for telephone services, for example - which the banks want to exit. This has the potential to add profits from five to seven million transactions to the bottom line, although a source familiar with the scene said only the 1,010 post offices linked to an automated payment network would be included in the deal.

This would exclude about 900 smaller post offices, whose businesses are already vulnerable.

Whatever agreement is reached in these talks - chaired, unusually, at the Department of An Taoiseach - An Post will not have room for failure when forcing change through.

In the new environment, the company can no longer subsidise unprofitable elements of its business with profits from other sectors.

Its reserved business is now subject to scrutiny by the Office of the Director of Telecommunications Regulation, which estimates the cost of regulation to An Post at £2 million.

This is a large bite from thin profits at the company, which has factored in internal costs of £1 million for the regulation.

But for Mr Hynes and his management team, a lapse of concentration now would cost far more.