Advent to buy UK parcel delivery group Hermes in €1bn deal

US private equity firm Advent International has agreed a €1bn deal to buy the UK operations of Hermes parcel delivery group and take a minority stake in its German business, seeking to capitalise on the boom in online shopping amid the pandemic. 

The buyout group will acquire 75 per cent of the company’s Leeds-based UK business, which delivers parcels for retailers including Next and John Lewis, from the German mail-order group Otto. It will also take a 25 per cent stake in its German business. The combined purchase price of the two stakes is about €1bn, a person familiar with the matter said.

Hermes is positioning itself as one of the likely corporate winners from the pandemic. Online shopping is “booming as a result of coronavirus,” said Martijn de Lange, chief executive of Hermes UK, and it needs investment from Advent to expand its delivery operations.

However, the company has also warned that it cannot predict how severe the impact of a global economic downturn would be on consumer spending and how badly this may affect its operations. 

“I think the online surge will overshadow it, but there will definitely be a slowdown which will impact our business,” Mr de Lange said. “What’s important is that the retail industry doesn’t have too many casualties.”

The deal “is part of a long-term investment play around the fulfilment of ecommerce,” said Nick Rose, a managing director at Advent who led the deal. The company “expects the peak [in demand] this year to be the largest peak to date.”

Parcel delivery has typically been a low-margin business, and the UK has a more competitive market than many other European countries.

Forty per cent of top UK online retailers use Royal Mail, while 36 per cent use DPD and 31 per cent use Hermes, with some using more than one delivery group, according to a 2019 report from Apex Insight.

Frank Proud, director of Apex Insight, said Hermes’ UK business “is consistently growing market share, faster than a growing market, with industry-leading margins.”

Competing with Amazon is never the best place to be

However, he warned that any move by Amazon to compete with Hermes’ core business of serving retailers would be very difficult for the UK business. “Competing with Amazon is never the best place to be,” he said.

Hermes’ UK operations made £46m in pre-tax profit in the year to February, up from £36m a year earlier, its accounts show. 

Advent already owns Integer and InPost, Polish parcel-locker businesses. Mr de Lange and Mr Rose both said no plan had been made to merge those with Hermes.

In 2018 Hermes lost a legal battle with a group of its couriers, when a UK tribunal said they had the right to be classed as workers rather than independent contractors, in a legal test for the so-called gig economy. 

The ruling — in which an employment judge said evidence given for Hermes by its head of delivery Conor Ormsby “had an air of unreality” and was “in respects implausible” — gave the couriers an entitlement to the minimum wage and holiday pay. It has since struck a deal with the GMB union.

Additional reporting by Michael Pooler in London