- Possible government intervention
- Powerful workforce
In true Royal Mail fashion, news of a possible takeover was delivered to shareholders a few days late.
On 9 April, International Distributions Services (IDS) received a non-binding proposal from billionaire Daniel Křetínský, otherwise known as the “Czech Sphinx”. Křetínský, who already owns 27.5 per cent of the postal business through industrial giant EP Group, proposed a price of 320p a share.
He was rebuffed. In a statement on 17 April, IDS described the approach as “opportunistic” and said it “significantly undervalues” the company and its prospects. Key investors have also spoken out against it. Redwheel, IDS’s third-largest shareholder, said it was in “full agreement” with the IDS board and warned against “corporate predators”.
That is not the end of the matter. Křetínský has until 15 May to announce a firm intention to make an offer and said he will “continue to engage constructively” with the courier. He added that private investment has become "crucial" given Royal Mail's weak financial performance and pressure from multinational companies.
If EP Group comes up with an offer that is acceptable to the board, however, it could face another roadblock: the UK government.
Likelihood of a takeover
Analysts at Peel Hunt are relaxed, noting that no action was taken when Křetínský increased his stake in IDS from 22 per cent to 27.5 per cent in 2022. Some institutional investors are of a similar opinion, arguing that the horse bolted two years ago.
Other brokers are far more sceptical, however. The National Security and Investment (NSI) Act, which came into force in January 2022, gives the government the power to scrutinise and ultimately block business transactions to protect national security. While this legislation didn’t prevent Křetínský upping his stake above 25 per cent in 2022, a full-blown buyout could spark a different response.
Liberum analyst Gerald Khoo said the government's earlier decision does not prejudice a fresh review – or a fresh outcome. "We see only political downside in clearing a takeover, especially in an election year," Khoo said. "Given this obstacle, we struggle to envisage a successful deal, even at a price level improved to secure a board recommendation.”
Khoo added that the government would feel reasonably confident of being able to predict and influence the behaviour of a UK-listed group, given the regulations and corporate governance code. “The same cannot be said for an unlisted company controlled by one person.”
There are some practical issues, too. The government took two months to scrutinise Křetínský’s stake in 2022. A full takeover review is likely to take considerably longer, but if the general election is held in October 2024 there are less than five months for things to be pushed through (including a pre-election purdah period).
Objections from postal workers could also prove troublesome. Royal Mail is heavily unionised and the Communication Workers Union has already signalled its unhappiness. “The truth is handing over the ownership of one of the UK’s most important institutions to a foreign equity investor cannot be right,” it said. “The vulnerability of Royal Mail Group to this type of bid is a clear demonstration of how privatisation has failed.”
Potential repercussions
It is possible, however, that Křetínský’s approach will catalyse other developments that are beneficial for shareholders. The communications regulator Ofcom is under even more pressure to ease the burden on Royal Mail, for example, having recently finished its review into the universal service obligation.
Royal Mail has proposed a series of solutions which it claims will save up to £300mn a year “if fully and swiftly implemented”. These include halving second-class letter deliveries and slowing down business mail.
Both Peel Hunt and Liberum have also flagged potential investor interest in GLS, the profitable European arm of IDS. “In our view, selling GLS would not come within the scope for the NSI Act (given it does not operate in the UK), and so would come with much lower execution risk,” Khoo said.
The valuation certainly looks tempting. Bernstein analyst Alex Irving said IDS has long traded at a sum-of-the-parts discount. “GLS, as a parcel pure-play levered to e-commerce growth, could easily be worth £3-£4 per share on our estimates, with investors implicitly ascribing negative value to Royal Mail,” he concluded.
As ever, there is little agreement. Redwheel is uneasy, for example, arguing that it is not in the interests of the shareholders, employees or customers of Royal Mail for it to be broken up.
One way or another, however, change is coming for the iconic British institution.
