Investors threaten Daniel Kretinsky’s bid for Royal Mail

Big City investors speaking for more than a fifth of shares in Royal Mail owner International Distributions Services (IDS) plan to vote against a £3.6 billion bid by Czech billionaire Daniel Kretinsky, The Mail on Sunday has learned.

They have been advised that the £3.70-a-share offer recommended by the IDS board seriously undervalues Royal Mail if regulator Ofcom recommends changes to Royal Mail’s Universal Service Obligation. This guarantees letters and parcels are delivered six days a week across the UK at a fixed price, which Royal Mail says is a drag on its loss-making business.

If Ofcom removes the Monday-to-Saturday obligation for second-class letters it could generate an extra £300 million in income for Royal Mail, sources say. Investors argue such an outcome would risk IDS being sold on the cheap to Kretinsky, dubbed the Czech sphinx due to his inscrutability, as the Royal Mail’s long-term prospects would be a lot stronger.

In this case the starting price for the bid would be £4 a share – or up to £5 based on recent UK takeover premiums, the investors insist.

Chairman Keith Williams and the rest of the board would have a fiduciary duty to revise their recommendation, they add.

The offer for IDS is among the big industrial challenges facing Keir Starmer’s Government.

The Labour manifesto committed his administration to ‘robustly scrutinise the deal’. Business Secretary Jonathan Reynolds is expected to invoke powers under the National Security & Investment Act as soon as next week and ‘call in’ the deal before Parliament goes into recess.

The Government has come under pressure from the Communication Workers Union to intervene to save the 500-year-old postal service from falling into foreign ownership. Ideally, the Union would like to have some kind of partnership arrangement as part of Royal Mail’s future.

The bid by Kretinsky’s chosen vehicle EP UK is largely to be financed by debt provided by a consortium of overseas banks led by BNP Paribas. The £3 billion of leverage, together with up to £2billion of debt already on IDS’s books, would severely limit investment in the postal service should the Czech offer be successful. 

It is also not clear whether Kretinsky, who already holds 27 per cent of IDS shares, would have the capacity to raise his offer to a level acceptable to some institutional investors. The Czech, whose partner is Olympic showjumper Anna Kellnerova, also has stakes in Sainsbury’s and West Ham Football Club.

The head of Ofcom, Dame Melanie Dawes, has a critical role to play. There has been silence from the regulator since April, when it put forward proposals for a review that would dramatically change the Universal Service Obligation.

If its proposals were accepted the price of first class postage would have to rise to maintain six-day-a-week deliveries, and second class mail would be less frequent.

Investors say they are in a race against time to save Royal Mail from an overseas marauder. Private equity firm Apollo last week swooped on logistics group Evri, owned by Advent, for £2.3 billion. Evri – previously called Hermes – could provide a direct challenge to the Royal Mail in parcel delivery.

With Royal Mail’s struggle in the UK to fully embrace parcel tracking it risks surrendering its superior logistics capacity to rivals cashing in on the boom in online shopping. Institutional investors also recognise the value of the brand as there are few commercial enterprises bearing the title ‘Royal’ in their name let alone carrying the King’s profile on their products.

In the end, while the Government won’t want to be seen presiding over the sale of a national asset to an unaccountable foreign buyer, price is likely to settle the matter, with the share register invaded by hedge funds and arbitrageurs.

Kretinsky’s undertakings to maintain the service for five years would run out as the next Election approaches and could be rapidly rescinded – destroying a vital public service in the process.

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