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There are many reasons for opposing the ‘Czech Sphinx’ bid for International Distributions Services (IDS), the owner of the Royal Mail.
These include the public interest, fragile knowledge of the would-be buyers Daniel Kretinsky and partners, workforce impact and rewards to fat-cat executives who failed to manage the organisation’s future.
Of most importance to investors is a headline price of 360p per share, which is not good enough.
Also worth serious scrutiny are financing arrangements. Public-to-private deals are destabilising and opaque, as the Bank of England notes in its just-released Financial Stability Report.
It cautions that widespread use of leverage makes companies in private equity ownership ‘particularly exposed to tighter financing conditions’.
Vital service: The Royal Mail is the oldest and most established form of communication in the nation and widely used by HMRC, the NHS and Returning Officers dealing with elections
The consequences have been there for all to see at underperforming grocer Asda as well as Thames Water.
Private equity has been particularly active in the UK and the Bank notes that some 15pc of corporate debt is tied up in such deals. It reports a high degree of concentration in finance, insurance, professional services and communications.
The Royal Mail is the oldest and most established form of communication in the nation and widely used by HMRC, the NHS and returning officers dealing with elections.
The bid for IDS is largely financed by debt. Lenders BNP Paribas, Citibank, Societe Generale and Unicredit are all from overseas – surprising given the asset at stake is British.
It may well be that in the current high-interest climate UK lenders feel they have more than enough exposure to private equity-style deals.
The takeover is to be paid for by a £1.1billion medium-term facility, a bridging loan of a further £750million, another bridging credit of £500million and a multi-currency loan of £500million.
All of this on an IDS balance sheet already weighed down with £2billion or so of debt also to be taken on by the buyers. The substantial premiums and fees to be applied means none of this is cheap money.
It begs the question as to where the investment cash for modernisation, maintaining headcount, keeping a UK HQ and fulfilling the universal service obligation in a shrinking letter post market will come from without substantial price increases.
Clearly, Kretinsky and company think there is cash to be released from real estate sales and development. That doesn’t happen very speedily.
It is hugely disappointing that the board, headed by Keith Williams, has failed to extract from Kretinsky and his Slovak investment banking colleagues at J&T more forensic detail on plans given a top heavy debt burden.
They should listen to the Bank of England’s financial stability committee.
It is demanding more detail on valuations and overall levels of leverage in private take-outs. They would reduce vulnerabilities in a sector where risk management among the banks needs to improve.
The proposed new ownership structure for the Royal Mail is hopelessly unstable for a vital public service.
Green gauge
Labour’s energy tsar Ed Miliband could well take some economics lessons from BP before going all-out to green Britain.
Chief executive Murray Auchincloss is recognising the cost to investors and the future of the company by rushing the carbon-free fences.
He is pausing renewable investments, focusing on acquisitions and new drilling for oil and gas and moving key staff and away from green projects.
BP is paying dearly for predecessor Bernard Looney’s carbon-free agenda. Its share price has cratered 12 per cent in five years. America’s biggest beast Exxon, which has doubled down on carbon fuels, is up 50 per cent.
Sharp jab
It has not been a good week for Emma Walmsley as she seeks to reboot GSK.
The NHS chose Pfizer’s respiratory vaccine for RSV over GSK’s pricier and more efficacious jab.
Now the US Centre for Disease Controls has pulled back from recommending the GSK shot for under-60s.
The shares came down with wallop. All this before Delaware court rulings on whether ulcer drug Zantac may have contributed to some forms of cancer.
Trying times.
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