Royal Mail is a bit of a basket case for investors at the moment and all the signs are there that a break up is on the cards and that at some point they will sell GLS, or at least float it as a separate entity.
What did Rico Back do?
Rico Back, who was recently ousted as Royal Mail CEO, was appointed the first Managing Director of German Parcel in 1989 and then led it’s sale to Royal Mail in 1999. Through acquisitions and the foundation of new companies a cross-European parcel service was formed and in 2002 a uniform brand, General Logistics Systems (GLS), was established. As the darling of GLS, Rico become CEO of Royal Mail in June 2018.
As you might expect, GLS continued to be profitable but under Rico’s tenure Royal Mail’s fortunes (specifically UKPIL) didn’t turn around, industrial relations with the CWU, relatively good under his predecessor, turned sour with accusations of Rico tearing up the 4 Pillars Agreement, and the Universal service is under threat with a likely conversation with the regulator in the offing.
What did Royal Mail say about GLS?
The wording of Royal Mail Results for the full year ending 29 March 2020 spells trouble ahead:
“Royal Mail and GLS are different businesses, with different strategies. At Royal Mail, our focus is on a step change in transformation; at GLS we aim to continue to grow. Our new structure brings more focus and accountability and whilst there are few synergies today between Royal Mail and GLS, in the medium term an international presence is clearly important, and the opportunity remains to create more value for shareholders. Given the challenges of the current year, the Board does not intend to pay any dividend in relation to 2020-21, but our ambition is to re-commence dividend payments in 2021-22, supported by GLS.”
– Keith Williams, interim Executive Chair, Royal Mail Group
Let’s pick this apart:
- “Royal Mail and GLS are different businesses, with different strategies”
In which case why are they not two separate companies able to deliver results to investors based on their individual achievements?
- “At Royal Mail, our focus is on a step change in transformation; at GLS we aim to continue to grow”
Ditto – the business are probably worth more as two companies than as one
- “There are few synergies today between Royal Mail and GLS”
The argument for keeping GLS within the Royal Mail group is getting weaker
- “the opportunity remains to create more value for shareholders”
Anyone familiar with eBay over the past few years from the spin off of PayPal to the sale of Stubhub and likely soon sale of eBay Advertising will know that ‘creating’ or ‘maximising’ shareholder value means flogging off the company jewels!
- “our ambition is to re-commence dividend payments in 2021-22, supported by GLS”
Royal Mail’s UK profits have gone down the toilet and they will use profits from GLS to keep Royal Mail afloat in the future.
To put Royal Mail’s profits into perspective, their adjusted profits for UKPIL are down 41.2% compared to 2019 and GLS profits are up 17.5%. With no dividend expected for 2020-21 and a hope that GLS profits will enable a dividend in 2021-22, all the signs are pointing to GLS being way better off as a separate entity.
If Royal Mail sell GLS, what next?
If GLS is sold, that leaves Royal Mail as the UK postal operator in dire financial straits. Royal Mail stated that they are “working with all stakeholders to underpin the USO to ensure it reflects user needs and is modern, contemporary and sustainable”. You can take that to mean they want to raise stamp prices and at the same time probably reduce the frequency of letter deliveries – no one really noticed that they didn’t get their credit card statements on Saturdays during the Coronavirus restricted operating times but they still got their parcels and that’s what consumers generally want.
We wouldn’t be surprised to see GLS sold off, a revamped USO resulting in a massive fight with the unions and even a potential separation of UKPIL into (loss making government supported) letters and a parcel division. Without GLS, Royal Mail would be weakened and a target for takeover.
An interesting question is who is running Royal Mail or rather who will run Royal Mail and what will they inherit? Stuart Simpson is the interim CEO of Royal Mail (UKPIL) and it is unusual for interim leaders to make such drastic changes as the wholesale management redundancies just announced – generally an interim leader’s role is to steady the ship until a permanent leader is found, not to make irreversible decisions.
Finally, who would buy GLS? Anyone willing to put a bet that the previous GLS management, possibly even including Rico Back, could pull together a team to put a bid in for the profitable part of the Royal Mail group? Pure speculation on our part – but it’s tough to let go of a business that you dedicated 30 year’s of your life to.
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