Going Publicly Postal: U.K.'s Royal Mail Considers IPO

NEW YORK (TheStreet) -- The U.S. Post Office has long been the butt of jokes for inefficiency, and in the last few years, it has been the focal point of a more serious discussion about whether, after losing $15 billion and considering a reduction of service, it should be privatized.

While those discussions haven't made much progress in the U.S., they have in other countries, most recently in the U.K., where yesterday it was announced that the Royal Mail could be privatized through an initial stock offering in April 2014.

Royal Mail wouldn't be the first publicly traded post office. Last month, Belgium floated its mail service, the BPOST, which the Wall Street Journal reports will yield 7% once it commences dividends. Deutsche Post ( DPSGY) in Germany has been publicly traded since 2000.

Despite perceptions of no growth and huge pension liabilities, Royal Mail will have a bullish case should it start trading. Its profit and free cash flow doubled in the last year thanks to new automated sorting technology and the closing of 30 facilities.

Parcel volume rose 13% growth in the last year, although over the last 10 years, total volume has declined 25%. In 2009, the U.K. government absorbed most of the Royal Mail's pension obligations, which should neutralize that threat, at least for now.

Selling the post office is not without controversy, however, and so the transaction may fail to materialize. Customers are concerned whether a private Royal Mail will have the same "universal service obligation" to deliver the mail, and employees are concerned that their pay and benefits would be cut. These are valid issues as future shareholders would expect profit growth.

The U.K. has a history of privatizations, including several utilities, British Airways ( BAIRY), airports and railroads.

The sale of Royal Mail could bring in 3 billion British pounds. That could be used to reduce the debt, albeit only slightly, or for other purposes. Still, Royal Mail is an an asset with value, and the promise of being able to sell an asset can be just as beneficial as actually selling the asset.

At some point, perhaps there could be a global post office exchange-traded fund. Shares of Deutsche Post have done very well. The 7% yield from BPOST should attract income investors, and if a Royal Mail stock is successful, it could be a catalyst for other postal services to list.

The obvious threat to investing in any publicly traded post office is email. How many monthly bills do you have emailed to you? How many of those bills do you pay electronically? How many magazines do you subscribe to today? How many did you subscribe to in 1990? When you want to get in touch with someone, do you still write a letter and drop it off at a mail box or do you go for the almost instant gratification of an email, instant message or text? Even many financial documents can now be scanned and emailed.

Postal services cannot rely on eBay ( EBAY) for their growth; they will be forced to innovate further and explore new but related lines of business.

Since its debut last month, BPOST from Belgium has dropped 2%, compared with a 6% decline for iShares MSCO Belgium ( EWK). The decline and the promise of a 7% yield make it seem like a utility company. That would be a reasonable expectation for Royal Mail.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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