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Royal Mail has said its sale to the Czech billionaire Daniel Kretinsky risks triggering a financial squeeze, raising fresh fears about the potential threat to the postal service from his debt-fuelled takeover.
Parent company International Distribution Services (IDS) has said that nearly £2.4bn of loans could be called in as a result of the deal.
Investors have the right to demand repayment of nearly £1.5bn of fixed-rate bonds if a sale affects its investment-grade credit rating. In addition, a sale of the company could also result in lenders either withdrawing or renegotiating an unused £925m borrowing facility.
The disclosures, contained in annual results filed 10 days ago, add to the concerns surrounding Royal Mail’s £3.5bn takeover by Kretinsky’s EP Group. As a result of what the board calls “uncertainty” over its existing financial arrangements in the event of any takeover, it has been forced to admit that the future of the company could be at risk.
In results published before Mr Kretinsky confirmed his offer last week, the company said: “While the board have been seeking assurances in relation to EP Group financing arrangements through due diligence and negotiation of contractual commitments, the financing arrangements of EP Group are outside of the control of the board.
“The directors have concluded that the extent of the uncertainty related to whether existing finance will be recalled following a change in control, together with a lack of visibility or control over the availability of funding… are conditions that constitute a material uncertainty… that may cast significant doubt on the entity’s ability to continue as a going concern.”
The disclosure comes amid fears in some quarters that Mr Kretinsky’s bid will put IDS’s balance sheet under serious strain. £2.3bn of the £3.5bn offer will be financed by new debt, provided by a syndicate of four large European banks: BNP Paribas, Citi, Societe Generale and Unicredit.
After weeks of negotiations, the board of IDS last week said it had recommended the 370p a share offer. Mr Kretinsky has promised to invest in Royal Mail and made a series of legally binding pledges to protect its universal service.
The terms of IDS’s loans mean they can be withdrawn if there is a change of control such as a sale and its credit rating is downgraded. IDS’s debt is currently rated at BBB with a negative outlook, putting it two notches above “junk” status. The costs of servicing its debt last year totalled nearly £100m.
Sources close to Mr Kretinsky pointed out that he has offered legally binding undertakings designed to protect IDS’s credit rating. The deal would be structured so that the company’s investment-grade rating is “expected to be maintained post acquisition”, EP Group said.
IDS will become a “core subsidiary” of EP Group, meaning its rating should not drop below the broader group’s.
The commitments are designed to relieve fears about Royal Mail’s future in private hands.
One analyst said lenders would be likely to use the potential takeover as an opportunity to renegotiate the debt at a higher price, since there would be less transparency about Royal Mail’s financial status under private ownership.
Mr Kretinsky has also vowed not to split Royal Mail, which is heavily loss-making, from its highly profitable parcels arm. However, shareholders are worried that the board is selling the company on the cheap, which would enable Kretinsky to make a quick return through asset sales.
The tycoon could be getting his hands on one of the biggest corporate property portfolios in Europe. Royal Mail owns an estate of prime sites situated in towns up and down the country in locations that many delivery companies – as well as big property developers – covet.
In 2011, Royal Mail offloaded a 2.3-acre site in London’s West End for £120m. Six years later the redeveloped site was sold for £435m.
A sale of Royal Mail would mark the first time that any country has sold its postal service to overseas investors. Jeremy Hunt, the Chancellor, has said that any takeover will face scrutiny under national security laws.
Mr Kretinsky has said that “the EP Group has the utmost respect for Royal Mail’s history and tradition”.
Both IDS and EP Group declined to comment.
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