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Treasury & Capital Markets / Europe
Royal Mail in play amid UK postal sector review
Non-UK ownership mooted for service, founded by Henry VIII, facing challenges
Keith Mullin 22 Apr 2024

Logistics is a global business. By definition. But that hasn’t stopped news of a non-UK bidder taking a run at International Distributions Services (IDS), the FTSE-listed company that owns the UK’s postal service Royal Mail and parcel company GLS putting UK media and political circles into a real tizz.

The story took me back to 2013. To October 22nd to be precise. I was scheduled to be chairing an equity capital markets conference on that day. Not long before the event, I was told the space we had booked had been commandeered for a short news session with George Osborne, then UK chancellor of the exchequer (finance minister).

But rather than telling our speakers and delegates we were being ejected, we told them instead that the chancellor would be opening our event! It worked like a dream. They got front-row seats and I had the perfect opportunity to ask Osborne to react to fierce criticism that the British government had underpriced the then-recent privatization initial public offering (IPO) of Royal Mail in a giveaway to his mates in the City. I don’t recall exactly how Osborne responded except that it was a political non-answer. (The IPO was underpriced, incidentally, as confirmed by a National Audit Office report.)

Fast forward to today. It’s a story that has it all:

  • A bid for IDS by a Czech billionaire who also happens to be part-owner of English Premier League football club West Ham United. [The latter is irrelevant, but there’s nothing quite like throwing football into the mix to get the emotions running …]
  • Arousing a sense of history and laying out the prospect of Royal Mail, a UK icon founded by Henry VIII in 1516, slipping into foreign hands.
  • Mutterings about an eventual break-up of IDS that would see Royal Mail split from GLS.
  • Murmurs about a possible government veto under the National Security and Investment Act on national security grounds. The government undertook a review of the same investor’s plan to increase his stake in 2022, but it took no action. But it did note at that time that, because acquisitions are assessed on a case-by-case basis, “any future acquisition could be subject to a separate assessment under the Act if deemed necessary.”
  • There’s a new management team in place. Emma Gilthorpe (previously COO of Heathrow airport) starts as CEO of Royal Mail on May 1st. Karl Pfaff took up his role as CEO of GLS last October, replacing Martin Seidenberg who was appointed as CEO of IDS in August 2023. Does the team have the skills to turn things around?
  • Making the story particularly interesting is that all the above comes just as Ofcom, the UK communications services regulator, undertakes a review of the UK postal service, including the Universal Service Obligation that dictates minimum letter delivery speeds and frequencies. The review is being undertaken because of the dramatic plunge in letter volumes and the rise in parcel deliveries.

Premium bid

Royal Mail hasn’t had an easy time of it in recent years as technological and social change has altered the way we communicate. When was the last time you posted a letter? IDS shares have been in the doldrums and were 65% off their three-year high before news of the takeover proposal emerged. But shares leapt by almost 29% on April 17th after the company’s board announced it had rejected a preliminary and conditional non-binding proposal for a possible cash offer from EP Corporate Group.

EP is an umbrella company for Czech investor Daniel Křetínský, and the offer was for the capital he didn’t already own. He is already IDS’s largest shareholder with 27.56% of the voting rights. The offer was submitted at £3.20 (US$3.96), a 49% premium to the April 16th close, a level the stock hadn’t seen since May 2022. EP has until May 15th to announce a firm intention to bid or walk away. Media reports suggest the company is thinking about it.

Křetínský’s investment company VESA Equity Investment, which sits under the EP umbrella, self-describes as a “private investment firm focused on making long-term, strategic investments in publicly traded companies”. It has a diversified portfolio, including stakes in other mail-related businesses such as 29.9% in Dutch postal operator PostNL and more than 15% in France-based mailing group Quadient (previously called Neopost).

IDS’ statement rejecting the proposed offer says the timing is opportunistic. Of that there can be no doubt. It also notes that the bid fails to reflect the company’s growth potential and prospects. That’s more debatable in the circumstances.

The Communication Workers Union, the industry’s main trade union that has had a fractious relationship with IDS, is unequivocal in its opposition. To both sides. “The truth is handing over the ownership of one of the UK’s most important institutions to a foreign equity investor cannot be right,” CWU general-secretary Dave Ward says in a statement without qualification. He adds: “We must be equally clear that the direction of the current Royal Mail board remains unacceptable.” I guess being hostile to both sides makes you neutral.

Sustainable business model?

EP says it views the UK as an attractive and dynamic market for investment but also recognizes Royal Mail’s challenging situation: “Weak financial performance, poor service delivery and a slow transformation, in the face of a market going through structural change, have put the business under unsustainable pressure. With the increasing competition from multinational companies in the UK postal market, private investment in Royal Mail becomes crucial,” EP’s statement reads (my italics).

Whether IDS’s business model is sustainable is something Martin Seidenberg and Ofcom have both acknowledged, which interestingly puts all the protagonists on the same page. At the time of IDS’s fiscal nine-month trading update in January, Seidenberg acknowledged: “It is simply not sustainable to maintain a delivery network built for 20 billion letters when we are now only delivering seven billion”.

And in its call for views from interested parties on the future of the UK postal service, also in January, Ofcom says: “The universal postal service risks becoming unsustainable as people send fewer letters and receive more parcels, meaning reform is necessary to secure [Royal Mail’s] long-term future … Given the significant cost of delivering the universal service, there is an increasing risk it will become financially and operationally unsustainable in the long term.” [All my italics].

Downgrading speed, frequency

Ofcom’s review is considering two primary options: changing first- and second-class and business products so that most letters are delivered via a standard service taking up to three days or longer; and reducing the number of delivery days from six to five or three. Other European countries (Belgium, Denmark, Italy, Netherlands, Norway and Sweden) have already made changes in this regard.

Ofcom calculates that cutting letter deliveries to three days a week will result in net cost savings to Royal Mail of up to £650 million. Now if that’s not a good reason to make a pre-emptive speculative bid, I don’t know what is.

Particularly as IDS’s own submission to Ofcom focused on a cut in deliveries of non-first-class letters to every other weekday (from the current six days a week) and aligning the speed of standard bulk business mail deliveries with second class so they arrive within three weekdays instead of two currently.

A government update is expected in the summer. There’s a lot riding on this. Will the results of the various legs of this story be sent to interested parties in the post? I suspect not.

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