Britain’s Royal Mail (ROYMF) went public Oct. 15 at 330 pence per share, or approximately $5.30 in U.S. dollars. Almost 500 years old, the former state-owned delivery business has seen its stock increase as much as 65% in the eight days of trading since its IPO.
Other governments including Canada’s are watching these events unfold with serious interest. And at a time when most governments are in need of cash, you would think the U.S. Postal Service (USPS) is a serious candidate to go public.
It’s not certain than an IPO for the USPS is a good idea, much less one that would actually happen. To get a better idea, let’s take a look at the pros and cons.
The USPS has been dead weight for the federal government for many years now. Cutting it loose so that someone else can lose money operating it seems like a sensible idea. In 2012, it lost $15.9 billion. Over the past six years it’s lost a cumulative $41 billion. The last time it made money was 2006 when it delivered a $900 million surplus. Consistent profitability isn’t its thing.
Devin Leonard of BusinessWeek points out that the Democrats and Republicans alike are making it awfully difficult for the Post Office to make money. The Democrats, protecting their union friends, don’t want to fiddle with anything that cuts jobs; the Republicans don’t want to allow the Post Office to expand its operations because that would put it in competition with the private sector.
USPS is operating with one hand tied behind its back.
Congress, not wanting to make any kind of decision, has forced the Post Office to continue six-day delivery of first-class mail. An IPO would allow the Post Office to focus on package delivery and other more profitable endeavors while still providing a decent level of service for regular mail.
As someone who lives in Canada where Saturday delivery of mail ended in 1969, I can say with much certainty that your quality of life won’t be diminished receiving one less day of mail.
The reality is that regular mail becomes less necessary as every day passes. The real money is in packages. Take the Canada Post for example. It lost C$104 million in the second quarter due in large part to a 6.3% decrease in transaction mail, which includes letters, bills and statements. Parcel delivery on the other hand saw an increase of 5.1% year-over-year. That’s why it’s introducing same-day delivery in the Toronto area for online customers at Walmart (WMT), Best Buy (BBY) and several others.
That’s where the demand is and it’s no different south of the border.
The Royal Mail’s IPO valued its business at $6.9 billion including debt. That’s about 0.46 times revenue. At that same multiple, the USPS would be valued at $30 billion including debt, more than four times the Royal Mail. Furthermore, if you take into consideration that JPMorgan (JPM) told the UK government earlier in 2013 that the delivery service could be worth as much as $16 billion, that puts the USPS valuation as high as $70 billion.
Even at half that amount you can’t look a gift horse in the mouth. To not even explore the idea would be ludicrous especially when you consider that 21 investment banks threw their hats in the ring to take Royal Mail public with seven actually getting some business. The interest in USPS would be equally as attractive to investment bankers. If priced right, investors could be plentiful.
Although my valuation estimate for USPS runs as high as $70 billion, it doesn’t take into consideration that the Royal Mail actually makes money and has for some time. The same can’t be said for the USPS.
In February 2012, the USPS published a five-year business plan that sought to remove $22 billion in annual costs from its operations by the end of 2016. In doing so it would be able to repay the $15 billion it owes the U.S. Treasury. But in order to do all of this, it needs the help of Congress. The Saturday delivery issue is just one example how the postal service’s hands are tied. If Congress doesn’t untie them, its annual losses could be as high as $18 billion by 2016. That’s never going to fly with investors.
Probably an even bigger impediment to going public than its large losses is the Postal Accountability and Enhancement Act, passed in 2006, which forced the USPS to pre-fund the present value of 75 years of its pension and health-benefit fund over 10 years; that’s $5.5 billion annually. In 2011, it couldn’t pay because it didn’t have enough cash to do so. But here’s the scary thing — its pension is more than 100% funded compared to 42% for the federal government and 80% for the average Fortune 1000 company. The USPS is being held to a standard that no one else has to live up to. Until this requirement goes away, there’s no possibility of an IPO.
The USPS, in my opinion, isn’t that far from making money. Excluding the pension fiasco in the previous paragraph, its adjusted net losses over the past three years have averaged around $4 billion. Eliminate Saturday mail delivery and raise postage rates by a dime and it would likely be in the black.
Remove all the shackles and it might be able to put the Royal Mail to shame.
The bottom line is that it’s an IPO I’d love to see. Unfortunately, given the federal government’s inability to take action on anything, it will be years before an IPO is given serious consideration.
And that’s a darn shame.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.