How Royal Mail can deliver billions to new owner Daniel Kretinsky

• Who is Daniel Kretinsky, the Czech Sphinx?

The Czech billionaire is months, if not weeks, away from completing his controversial £3.6 billion takeover of International Distribution Services, the parent company of Royal Mail. Last week, he cleared the main hurdles standing in his way by agreeing legally binding undertakings with the government and postal union. Then, on Thursday, he received national security clearance to proceed.

The clearances have come at a cost, however.

Kretinsky will give the government a “golden share” in the company and has committed to a “one price goes anywhere” six-days-a-week letters service for at least five years. During this time he will also need to keep net borrowing below two years’ of earnings, and he cannot raid Royal Mail’s gargantuan pension scheme, which boasts a £1 billion surplus.

In a separate agreement with trade unions, Kretinsky has vowed to set up an advisory committee through which workers could influence corporate decision-making. And he has agreed to cap the number of self-employed postal workers who drive their own vans to address concerns that Royal Mail is being transformed into a “gig economy” operation.

Dave Ward, general secretary of the powerful Communication Workers Union, which represents 110,000 postal workers, is surprisingly bullish about the future under the Czech. “The union is never going to have more influence over the company,” he said.

Dave Ward doesn’t think Kretinsky is an “asset-stripper”

YUI MOK/PA

At the very least, Kretinsky now seems shackled to Royal Mail for the next five years given the extent of his commitments. “My ambition is to be a shareholder for the rest of my life,” Kretinsky told The Sunday Times in June.

But there are still ways he could cash in — starting with the company’s extensive property portfolio.

It is perhaps unsurprising that an operation that dates back to the days of Henry VIII owns a vast network of buildings.

In recent years, the business has begun construction of a handful of “superhub” automated sorting offices the size of 30 football pitches. But the company still owns 37 large processing sites similar to the one on Leeman Road, York, as well as more than 1,200 delivery centres across the country.

Royal Mail has already begun selling off a few buildings in prime locations. Much to the chagrin of postal enthusiasts, the company sold off part of Mount Pleasant, historically its main central London sorting office, to Taylor Wimpey for £194 million in 2017. And Royal Mail raised £101 million in 2019 by selling a former south London depot to developers planning to turn it into 900 flats.

Part of Mount Pleasant in north London was sold off in 2017

ALAMY

Yet the postal monopoly is still sitting on bricks and mortar worth £1.4 billion, according to recent company valuations.

Not all will boast a prime location such as that on Leeman Road, where a train from the nearby station takes less than two hours to London. But insiders reckon that Royal Mail’s property empire could be worth far more, not least in a country where the government has pledged to cut planning red tape and “get Britain building again”.

Another option, sources said, could be to explore a sale and leaseback of some of its properties rather than selling them and moving to cheaper out-of-town locations. Private equity-backed Morrisons, for example, raised an estimated £331 million under a “ground rent financing” with property investor Song Capital earlier this year.

Royal Mail’s property portfolio is not the only lucrative asset on the group’s balance sheet, however.

General Logistics Systems, or GLS, the overseas arm of Royal Mail, has long been seen as the jewel in the crown of the former FTSE 100 group. Where Royal Mail has laboured under industrial disputes and commitments to loss-making letter deliveries, GLS carries only parcels and is not subject to costly regulation, meaning it is far more profitable.

Take GLS’s most recent returns in the six months to September 2024: it generated £112 million of operating profit on £2.4 billion of revenue, compared with Royal Mail, which lost £138 million on £3.9 billion of revenue.

GLS could be worth as much as £4 billion as a standalone entity, sources said. Although last week’s undertakings committed Kretinsky to retain control of the division, this was for only three years rather than the five; by 2028, Kretinsky could be free to sell off GLS, a division that is worth more than he is paying for the entire group in the first place.

Sorting parcels at a Royal Mail superhub in Daventry, Northamptonshire

CHRISTOPHER FURLONG/GETTY IMAGES

Perhaps Kretinsky’s shrewdest bet, however, is that he can convince the government and regulators to agree to a subtle watering down of rules on letter deliveries that could save Royal Mail £300 million a year.

On the face of it, it looks like the company’s previous plans to axe Saturday postal rounds has been shelved. Crucially, however, this relates only to first-class letters: there is no similar guarantee that second-class mail will be delivered six days a week under his tenure.

• Government to hold golden share in Royal Mail

Royal Mail has already been pushing for regulator Ofcom to tinker with what is known as the Universal Service Obligation, or USO, so that it can axe second-class letter deliveries on Saturday. The regulator is considering its options and will come to a decision on the proposed changes next year.

Meanwhile, the government appears amenable. Jonathan Reynolds, the business secretary, told the Commons business committee in November that while adhering to the USO was “essential … I am pragmatic about the future”. Last week he repeated his desire for pragmatism in relation to the minimum service levels but highlighted that it was important to “understand that the letter market has declined a lot in recent years”.

This all matters because of the way stamp prices are regulated. Where second-class prices are capped at 85p until 2029, first-class is effectively uncapped. In recent years first-class stamp prices have soared from 95p in 2023 to the current level of £1.65.

• Royal Mail cutting deliveries ‘could kill off handwritten letters’

So Kretinsky, in theory at least, would be able to discourage people from buying first-class stamps by hiking prices further still. Buying second-class stamps for posting a letter will look far more attractive, pricing people out of the six-day-a-week service and into a five-day-a-week one as a result.

Kretinsky declined to comment this weekend, but when asked in June whether he would cap first-class stamp prices, he refused to make “unconditional commitments”.

“Royal Mail is not making more money on letters, the problem is that it’s maintaining the whole network. And because there are a few letters, every letter … simply costs more,” he said. “I can 100 per cent guarantee that we [will] take all the measures so that the letters are as cheap as possible.”

• Royal Mail fined £10.5m for missing letter delivery targets

Whether the Czech Sphinx — a moniker he earned for his inscrutable investment style — will look to quickly recoup some of his putative £3.6 billion investment remains to be seen.

Even if he were to begin selling off property, rake in big bucks by pricing the UK into a five-days-a-week letters service, and raise billions by offloading GLS, Kretinsky would have to hand over a hefty chunk of the proceeds to postal workers. He has committed to giving staff 10 per cent of any dividends drawn from Royal Mail.

For all his inscrutability, it is fair to say that buying Royal Mail in order to make a quick buck would be at odds with Kretinsky’s investment approach elsewhere. His supporters point out that the 49-year-old has a track record of acquiring infrastructure-style businesses for the long term. Unlike private equity, “he doesn’t have to retain capital to anyone”, said one ally.

One of them now seems to be Ward. For now, at least. “I don’t believe that he is an asset-stripper,” he said.

Kretinsky has made great play of the “responsibility” of owning a British institution such as Royal Mail. The country will have to wait to see if those promises are signed, sealed and delivered.