While Canada Post and Royal Mail differ in key respects, the latter's shares have rocketed since their recent IPO.Luke MacGregor/Reuters
As Canada Post inches closer to privatization, it hardly looks like a compelling investment. But at its core is a viable enterprise predicated on the transition from traditional mail to e-commerce.
An initial public offering may be just the thing to unlock that value. And given the returns these kinds of investments are capable of generating, the idea of a Canada Post IPO should get Canadian investors excited.
"There's been a lot of restructuring at Canada Post in recent years," said Larry MacDonald, a former Government of Canada economist and business author. "They've invested in new technologies. It's still a feasible operation."
Granted, the postal service is currently locked in a financial tailspin as mail volumes shrink and pension obligations soar. When Canada Post announced on Wednesday its plan to phase out home delivery, it reinforced deep concerns about its viability as a going concern under federal control.
The picture is dire. The company has lost more than $4-billion in equity value over the last five years. Without intervention, it expects to run out of money by next summer. It has a $6.5-billion unfunded pension obligation.
The measures announced on Wednesday are meant to save $700-million to $900-million per year. And the federal government has given Canada Post a four-year reprieve on making special payments to the pension fund.
That should give the postal service time to revamp its business. "The government will privatize [Canada Post] or the market will do it – by millions of us simply refusing to use it any more," said Ian Lee, an economics professor at Carleton University.
As the business of delivering letters declines, online shopping is generating a growing demand for parcel delivery. Royal Mail, Britain's recently privatized postal service, is having some success cashing in on that market. While the company faces the same industry pressures gripping Canada Post, Royal Mail is repositioning itself for e-commerce, having increased parcel revenues by 9 per cent in the six months through the end of September. The British company has already rewarded its first investors with a nearly 80-per-cent return and its earnings are expected to grow substantially over the next two years.
Such an outlook seems out of reach to Canada Post. But as the Royal Mail experience illustrates, the rigours of the market can impose some helpful incentives, ultimately building shareholder value.
"Privatization would force more discipline on Canada Post," said Vincent Geloso, a researcher at the Montreal Economic Institute. "Even partial privatization has done wonders in other countries, especially in terms of reducing the cost of sending a letter."
The Netherlands, Germany and Austria have all partially or fully privatized their national postal systems, resulting in improved service and lower prices, Mr. Geloso said.
That's a key part of the rationale for investing in government-owned enterprises going private.
"Whenever you privatize a government organization, there's lots of room for making it more productive and efficient and generally wringing out a lot more profit," Mr. MacDonald said. A classic domestic example is Canadian National Railway. Its earliest shareholders have been rewarded with a share price that has risen by 34 times since the 1995 IPO.
At the moment, however, Canada Post differs from Royal Mail in two crucial respects: At the time of the IPO, Royal Mail was profitable; it had also been relieved of its pension obligation by the British government.
For investors to develop a big appetite for a Canada Post IPO, the company will probably have to offer similar attractions.
"Typically governments will spruce it up a bit before they go public," Mr. MacDonald said. "So I would expect a period during which the government does make it look more attractive."
Tim Shufelt