City investors vote against Daniel Kretinsky’s bid for Royal Mail
- Offer could undervalue Royal Mail if universal service obligation is abolished
- Abolishing the Monday to Saturday requirement could generate an extra £300m
Controversy: Major IDS investors plan to vote against Daniel Kretinsky’s bid
Investors in major cities holding more than a fifth of Royal Mail owner International Distributions Services (IDS) are planning to vote against a £3.6bn bid from Czech billionaire Daniel Kretinsky, The Mail on Sunday has learned.
They have been informed that the £3.70 per share offer recommended by IDS’s board would significantly undervalue Royal Mail if regulator Ofcom recommends changes to Royal Mail’s Universal Service Obligation.
This ensures that letters and parcels are delivered across the UK six days a week for a fixed price, a move Royal Mail says is hampering the company’s loss-making operations.
If Ofcom abolishes the requirement to send letters Monday to Saturday, it could bring Royal Mail an extra £300m in revenue, sources say.
Investors claim that this would result in IDS being sold for next to nothing to Kretinsky, who has been nicknamed the Czech Sphinx for his inscrutability, as Royal Mail’s long-term prospects would look much brighter.
In this case, the starting price for the offer would be £4 per share – or up to £5 based on recent UK takeover premiums, the investors point out.
Chairman Keith Williams and the rest of the board have a fiduciary duty to review their recommendation, they added.
The supply for IDS is one of the major industrial challenges facing Keir Starmer’s government.
Labour’s manifesto has committed his government to “thoroughly scrutinise the deal”. Business Secretary Jonathan Reynolds is expected to invoke powers under the National Security and Investment Act as early as next week and “invoke” the Royal Mail deal before parliament recesses.
In Labour’s manifesto, his government promised to “rigorously scrutinise” the deal.
Business Secretary Jonathan Reynolds is expected to invoke powers under the National Security & Investment Act as early as next week to “unwind” the Royal Mail deal before parliament recesses.
The government has been under pressure from the Communication Workers Union to intervene and prevent the 500-year-old postal service from falling into foreign hands. Ideally, the union would like to see some form of partnership arrangement as part of Royal Mail’s future.
The bid from Kretinsky’s chosen vehicle EP UK is to be largely financed by debt provided by a consortium of foreign banks led by BNP Paribas. The £3bn of leverage, together with up to £2bn of debt already on IDS’s books, would severely limit investment in the postal service if the Czech bid were to be successful.
It is also unclear whether Kretinsky, who already owns 27 percent of IDS shares, would have the capacity to raise his bid to a level acceptable to some institutional investors. The Czech also has stakes in Sainsbury’s and West Ham Football Club.
Ofcom to review Royal Mail’s six-day delivery
Ofcom chief Dame Melanie Dawes has a crucial role to play. The regulator has been silent since April, when it proposed a review that would drastically change the Universal Service Obligation.
If the proposals were to pass, prices for first-class mail would have to rise to allow six-day-a-week delivery, and second-class mail would be delivered less frequently.
Investors say they are in a race against time to save Royal Mail from an overseas raider. Private equity firm Apollo last week snapped up logistics group Evri, owned by Advent, for £2.3bn. Evri – formerly known as Hermes – could directly challenge Royal Mail in parcel delivery.
As Royal Mail in the UK struggles to fully embrace parcel tracking, it risks surrendering its superior logistics capabilities to rivals cashing in on the boom in online shopping. Institutional investors also recognise the value of the brand, as few commercial enterprises carry the title ‘Royal’ in their name, let alone the king’s profile on their products.
Ultimately, the government will not want to oversee the sale of a national asset to an unaccountable foreign buyer. Price will likely settle the matter, with hedge funds and arbitrageurs infiltrating the share register.
Kretinsky’s pledges to maintain the service for five years would expire as the next election approaches and could be quickly revoked, destroying a vital public service.
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