City fail to back £3.6bn takeover of Royal Mail despite parent company’s board agreeing to deal

‘Czech Sphinx’ Daniel Kretinsky’s £3.6 billion bid for Royal Mail’s parent company has failed to win over the city – despite the company’s board agreeing to the deal.

Shares in International Distribution Services rose 4.3 per cent, or 13.8p, to 335p on the announcement, still below the offer price of 370p.

It indicated that investors do not yet see it as a done deal, with regulators and politicians still needing to be convinced and a new government possibly in place within weeks.

Kretinsky, already IDS’s largest shareholder with a 28 percent stake, last month saw an initial approach valuing the group at £3.1 billion rejected.

But a higher rating, together with pledges from Kretinsky’s EP group, including promises on jobs and the Universal Service Obligation (USO) to deliver mail across Britain at a single price, convinced the board.

Analysts remain skeptical as the general election is likely to mean further uncertainty over any government intervention in the deal and a national security investigation on the horizon.

Dan Coatsworth, investment analyst at AJ Bell, said: ‘The price has been agreed and recommended by the board, now comes the hard part in getting the government to approve the deal.

“The big question is which political party will be in power to decide, as the elections are only five weeks away.”

Chancellor Jeremy Hunt will not oppose the deal in principle, although it would be subject to national security scrutiny.

Labour’s shadow business secretary Jonathan Reynolds said Labor would ‘take the necessary steps’ to safeguard Royal Mail’s ‘unmistakable identity and place in public life’.

Liberum analyst Gerald Khoo believes removing national security oversight would be a “major hurdle.”

Khoo added: “While the commitments are significant, they cannot cover all contingencies and are only valid for a maximum period of five years.

“We still need to be convinced that this will be enough to get support from whichever government gets to make the decision.”

Khoo added that a review of the proposed acquisition “could take a long time.” “Even if that were not the case, any decision would violate the pre-election ban on making long-term decisions that would tie the hands of the next government.”

The cash takeover will be financed with £1.2 billion of equity and around £2.3 billion of debt, an EP executive told Bloomberg.

Debt facilities are provided by BNP Paribas, Citibank, Societe Generale and Unicredit.

The proposed takeover comes as Royal Mail struggles to return to profitability amid falling letter volumes and after a period in which the company was plagued by industrial disputes.

The shares were privatized in 2013 at a price of 330 cents and have had a torrid time since, peaking above 600 cents in 2018 and then falling below 120 cents at the height of the Covid-19 lockdowns in 2020.

The group’s rebrand to IDS highlighted the contrasting performance of loss-making Royal Mail and its sister company GLS, a European parcel carrier.

Last week’s full-year results showed Royal Mail made a £348m loss to the end of March, while GLS posted a £320m profit, leaving the wider group £28m in the red.

The company has lobbied for changes to its USO, saying it cannot meet delivery targets.

It has asked ministers and regulator Ofcom to reduce the requirements for the delivery of second-class letters so that they are delivered every other weekday.