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In a strategic move, billionaire Daniel Kretinsky sets his sights on Britain’s Royal Mail through International Distributions Services Plc (IDS). With 28% ownership already secured, his proposed £3.5 billion bid reflects a 73% premium, exploiting market uncertainty. Despite board approval, resistance wanes amid regulatory ambiguity. Kretinsky’s bold play hinges on restructuring prospects and governmental intervention. Amidst scepticism, shareholders weigh the gamble as IDS navigates a pivotal crossroads in its valuation and future.
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By Chris Hughes
Daniel Kretinsky’s attempted takeover of the company behind Britain’s Royal Mail is smart, opportunistic and tempting. The billionaire’s target, London-listed International Distributions Services Plc, has pretty much caved. And the government — at least the current one — doesn’t sound opposed to the national postal service changing ownership. ___STEADY_PAYWALL___
But if this process culminates in a genuine offer, shareholders must realize that Kretinsky is taking advantage of a moment of maximum uncertainty around the firm’s valuation in pouncing now.
The Czech lawyer-turned-entrepreneur already owns 28% of IDS. He last week dangled a potential offer worth £3.5 billion ($4.4 billion) including dividends. That’s some 73% above IDS’s market value in April — before his ambition was reported by the Financial Times. The premium is around double what’s customary to gain control, and this is a situation where the suitor is already halfway there.
The board thinks the price is fine; the shares haven’t traded above the proposal’s 370 pence level since March 2022. Talks are underway to firm up commitments with the government around how this highly politicized company will be run. After all, there’s no point formalizing an offer that works for the directors but not for the politicians.
The situation captures the dilemma facing many lowly valued UK-listed firms. The prudent starting point when private equity comes knocking is to reject the approach outright; there’s nothing a bidder can do the company can’t imitate. Indeed, IDS rejected a past Kretinsky overture in early April. And yet it’s also true that a takeover is nowadays often the surest way a UK midsized company can get its shares close to fair value. Hence, resistance doesn’t last long.
Investors have lost faith in IDS because it’s required to make first- and second-class deliveries six days per week to all addresses. The company is set up to handle 20 billion letters a year when it delivers 7 billion – and falling. IDS’s pre-bid valuation can be seen to entirely comprise GLS, a profitable international parcel business, and ascribe less than nothing to the domestic business.
Against that backdrop, regulator Ofcom is consulting on reform to what the Royal Mail should be, but it’s a long way from drawing conclusions. For its part, IDS proposes scaling back the second-class service and making changes to bulk business mail – moves that could save £300 million annually. These changes provide a clear path to financial sustainability. Whether the company eventually gets its way is the billion-dollar question.
Kretinsky has an eye for situations like this where governmental or regulatory intervention may also involve opportunities for private capital. Witness his interest in the assets of overindebted French IT firm Atos SE. At IDS, his non-binding price seems to adjust for a market that is unsupportive of mid-cap UK stocks in general, and pessimistic about the Royal Mail’s future regulatory framework in particular.
If you think that UK stocks are structurally cheap, and reckon that Royal Mail will be allowed to modernize, it makes sense to make an offer today amid the ambiguity. The IDS board is in a weak position. It must necessarily take a more cautious view of the chances of supportive reform, and whether any positive developments would ever push the share price up as high as Kretinsky’s mooted offer.
Shareholders need to decide for themselves whether Kretinsky is being overly optimistic about whether Royal Mail’s service obligations will be cut back. He will likely face constraints on leverage and governance to get government clearance. Yet even with these likely friction costs, he’s still willing to pay way more than IDS’s recent market value. His one concrete advantage is that he might find it easier to invest in restructuring the company, pushing it to hefty short-term losses, than if it stayed public. That’s about it.
If the government had reformed the postal service obligations three years ago, would this bid have arisen? Almost certainly not. It could take bullish shareholders — or a new government — to stop it.
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