£3.6bn bid for Royal Mail fails to impress the City

“Czech Sphinx” Daniel Kretinsky‘s £3.6bn swoop for Royal Mail’s parent company has failed to win over the City – despite the company’s board agreeing to the deal, writes John-Paul Ford Rojas.

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

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

Kretinsky, already IDS’s biggest shareholder with a 28pc stake, had seen an initial approach valuing the group at £3.1bn rejected last month.

But an increased valuation together with commitments by Kretinsky’s EP Group, including promises on jobs and the Universal Service Obligation (USO) to deliver post across the UK at a single price, won the board over.

Analysts remain sceptical, with the General Election likely to mean further uncertainty over any Government intervention in the deal and a national security probe in the offing.

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 is going to be in power to decide, given the General Election is only five weeks away.”

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

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

Liberum analyst Gerald Khoo believes that clearing national security scrutiny would be a “major hurdle”.

Khoo added: “While the undertakings are significant, they cannot cover all contingencies and they only apply for a five-year period at most.

“We remain to be convinced that this will be sufficient to secure support from whichever government gets to make the decision.”

Khoo added that a review of the proposed takeover “could be lengthy”.

“Even if that were not to be the case, any decision would fall foul of the preelection prohibition on making long-term decisions that would tie the hands of the next government.”

The cash takeover will be funded by £1.2bn of equity and around £2.3bn debt, an EP executive told Bloomberg.

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

The proposed takeover comes as Royal Mail battles to return to profitability amid plunging letter volumes and after a period when it has been wracked by industrial disputes.

Privatised in 2013 at 330p, its shares have since had a torrid time – peaking at above 600p in 2018 and then sinking below 120p at the height of Covid-19 lockdowns in 2020.

The group’s rebrand as IDS highlighted the contrasting performances of loss-making Royal Mail and its sister company GLS, a European parcels operator.

Annual results last week showed Royal Mail made a loss of £348m for the year to the end of March while GLS made a £320m profit, leaving the wider group £28m in the red.

The company has been lobbying for changes to its USO, saying that it cannot meet the delivery targets.

It has asked ministers and regulator Ofcom to allow it to reduce second-class letter delivery requirements so that it delivers them every other weekday.