I subscribe to The New Yorker but I’m a binge reader. The magazines accumulate in the living room for a few weeks, sometimes months, and then I’ll read a bunch of them in a weekend.
So it was that I recently stumbled across an article by James Surowiecki in the 23 November 2015 issue about media company Time Warner. It struck me that there are many similarities between Time Warner and some of the major postal operators.
Time Warner’s value has been affected by “cord cutting”, that is, consumers abandoning pay TV. Consumers watch via the internet, on their phones, on digital free-to-air TV.
But according to Surowiecki’s article, one part of Time Warner is booming: the cable and satellite television network HBO.
HBO is profitable, has a strong subscriber base, and has its own standalone streaming service.
“HBO has arguably never been more valuable. And that, oddly, makes this the perfect moment for Time Warner to let it go – to spin it off as a separate company in an IPO.”
Does this sound familiar? Think about the typical postal operator in a western country. Letter volumes are falling. Parcel volumes, on the other hand, are growing year after year.
Surowiecki poses the question: If HBO is doing so well, why get rid of it?
He offers two reasons:
- HBO would be far more valuable in the eyes of investors as a separate company. For large companies like Time Warner, the whole may be worth less than the sum of its parts. This, Surowiecki explains, is “because investors have trouble valuing corporate divisions and get worried about how the parts of a company interact.”
- There would be benefits to the day-to-day running of the company. Employee remuneration can be directly linked to the company’s performance.
For many posts, their parcel business is more profitable than the rest of the company. Would the parcel business be valued higher if separated from the post’s other business units?
For governments seriously considering privatising the post and extracting top dollar for a short-term boost to the budget, the temptation to only sell the profitable parcels business would be considerable, not just from a financial perspective but from a political perspective. Maintaining government ownership of the letters business and control of the post office network would reduce the risk of a backlash from consumer groups.
Surowiecki observes that in “a business as volatile as the media, giving up a cushion of steady earnings growth takes courage.”
If revenues from the parcels business are propping up the government-mandated letters service, then the government would be privatising the profit and keeping the loss-making portion of the business.
From a timing perspective, now might be the right time to spin off the post’s parcels business. Competition in B2C parcel delivery is intensifying.
Surowiecki observes that spinoffs don’t always make sense. Where there are real synergies between the different parts of the business, the case for keeping the company intact is stronger.
“This is an era of radical uncertainty in the media business,” says Surowiecki. The same can be said for many national postal operators.
Sign up for the Postal Hub e-newsletter: