The £3.6 billion, 370p a share takeover of International Distribution Services (IDS), the owner of Royal Mail, by a company owned by Czech billionaire Daniel Kretinsky has passed a review prompted by concern over national security, says Jasper Jolly in The Guardian. This means that Royal Mail, which can be traced back to 1516, will be controlled by an overseas owner for the first time. In return, the state will retain a “golden share” in IDS, so any changes to Royal Mail’s ownership, tax residency or headquarters will need its assent. Royal Mail has also agreed to uphold the universal service obligation for first-class mail for at least the next six years.
In addition to securing the support of the government, Kretinsky also seems to have won over the unions, which are now praising the deal as a “fresh start”, says James Warrington in The Daily Telegraph. Staff have been promised 10% of any dividends paid out to Kretinsky, as well as a greater say in how the company is run through “a new workers’ group that will meet with bosses once a month”. He also says there will be no compulsory redundancies until any reforms to Royal Mail’s universal service obligation have been made.
Royal Mail takeover: reasons for scepticism?
Getting the green light from the government and an agreement in principle with unions “clears some of the biggest hurdles” for Kretinsky’s efforts to buy Royal Mail, says Russ Mould of AJ Bell. While technically shareholders “still need to vote on the takeover”, logic suggests that any opposing shareholders “would already have expressed their dissatisfaction by now”. After all, while some have suggested that IDS’s overseas parcels arm is worth at least 350p per share, there “are no alternative bids on the table”, which suggest shareholders “might be ready to take the money and move on”. But there are valid reasons to be sceptical, says Alex Brummer in the Daily Mail. Far from “strengthening a misfiring company”, the takeover “would weaken the group’s finances”. It is particularly hard to see how Kretinsky can honour promises to unions and the government on jobs and investment while taking on an additional £3 billion of extra leverage. What’s more, the record of foreign indebted takeovers has generally been “depressing”, with Thames Water “up to its neck in sewage and borrowings”, while the swift private-equity break-up of aerospace group Cobham “has been detrimental to Britain’s defences”.
Sign up to Money Morning
Don’t miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don’t miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
No matter how good Kretinsky is at turning around the “underperforming” Royal Mail business, the underlying decline in the number of letters sent means that it will still be under pressure, says Hargreaves Lansdown’s Susannah Streeter. The success of the deal will therefore depend on long-term changes to the universal service obligation, especially concerning second-class mail, which would allow the firm to “right-size infrastructure to reflect the modern-day reality”. While the regulator is carrying out a review, any major reforms are “likely to be a long time coming”.
This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
