Royal Mail's instant billions a temptation for Canada Post: Don Pittis

It must be an awful temptation for Canada Post. Suddenly the dowdy, old, money-losing Royal Mail is a private company worth a cool $7 billion. Not only is the figure more than anyone expected, it is $2 billion more than it was valued at just yesterday.

• Royal Mail shares surge as it debuts on stock market
• Should Canada Post follow Royal Mail's example and privatize?

The sudden jump in value is a source of some controversy. That's because the owners of the 500-year-old mail service — that is, the people of the U.K. — only got about five billion. 

When the new stock started trading early Friday morning, demand was so strong that shares soared, making the new shareholders very happy indeed.

Inevitably, critics complained that the offering price had been set too low and the public had been bilked. But for the Royal Mail and its Canadian chief executive, Moya Greene, the thrilling ride has just begun.

I mean, besides the private sector salaries and flashy new offices that usually come with privatization.

The lure of leverage

The reason for the Royal Mail's excitement, and why Canada Post might be hungry to follow suit, is something called leverage (or gearing). Government agencies are not allowed to borrow the way that private companies can. But the moment a Crown corporation becomes a publicly traded company, that becomes an option. And the amounts are not peanuts.

In the private sector, it is quite normal for a healthy, publicly traded company to go to the market and borrow between 50 and 100 per cent of their capital value (called the debt-to-capital ratio). Thus, the higher the value of the company's stock, the more the company can afford to borrow and invest in new equipment, new methods and new employees.

In some ways, privatization is a one-time windfall that gives a former government agency a chance to transform itself.

And certainly Canada Post could do with the cash. This summer, our publicly owned mail service announced it had lost $100 million in the previous three months. Part of that was the cost of new equipment. But part of it is also the cost of providing 20th-century mail delivery service when customers have 21st-century demands.

Transforming a company the size of Canada Post takes time and it takes money. Now, the Royal Mail has that opportunity. But of course there is a catch.

Being able to borrow is one huge advantage of being a private company. But there are two huge disadvantages. 

One is that a private company has to make a profit. That means that as well as getting your mail delivered and covering your salary and equipment costs, you have someone else to pay. Shareholders expect a steady stream of dividends. Bond holders and banks from whom you have borrowed expect reliable repayments.

Be wary of the Nortel model

The other big disadvantage is that as a private company, you can go the way of Nortel and Kodak — in other words, you can go broke and disappear. And while bad for the company that goes broke, it is part of the wonderful process of capitalism where old companies fail and new companies with new ideas take their place. 

That's the reason for the high private sector salaries and the high reward for shareholder risk.

But when I think of the Royal Mail and Canada Post going broke, another company name floats before my eyes: Fannie Mae. That was an agency set up by the U.S. government in the Dirty Thirties to make sure average Americans could get a mortgage.

In 1968, the company was declared private, and the shares shot up. Investors were happy to take the profits in good years, but they were also convinced the U.S. government would never let Fannie Mae fail.

The Royal Mail is the only service that provides mail delivery in every part of Britain from the Shetlands to Land's End. Canada Post has an even more formidable duty with half as many people spread over 50 times the area. 

Even with all the advantages of digital communication, physical mail delivery is still an essential of modern life. As with Fannie Mae, if the single national mail carrier was about to pull a Nortel, taxpayers would have to cover the bet.

It may be that a revitalized mail service and free billions for a government to spend somewhere else may be worth the risk. That's what capitalism is all about.

Of course, if it doesn't pay off in the long run, it won't likely be the current set of politicians who face the music. So make sure you — the voter and taxpayer — call the tune.