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Royal Mail — a business built on delivering messages — has received a clear one from regulator Ofcom: we hear you. The universal service obligation to deliver six days a week may finally get the tweaks that Royal Mail has long desired. This introduces another hurdle for Czech billionaire Daniel Křetínský’s £5.3bn takeover bid.
The communications regulator on Thursday said it would look at changes to the delivery of second-class letters, while leaving first class unaltered. That means it is considering almost exactly the proposals that Royal Mail submitted earlier this year — the best sign yet that change is coming. If enacted, this could rejuvenate Royal Mail’s beaten-down owner International Distribution Services.
The issues with the USO are simple. Falling letter volumes mean it costs too much to maintain deliveries at the current rate. IDS shares were trading below their 2013 IPO price before the bid’s arrival.
The company has suggested that its proposals would save £300mn of costs. Reform would mean IDS is worth substantially more than the 360p per share in cash that Křetínský is offering. The deal falls over then, surely? Not so fast.
Shareholders face a difficult decision. The deal is being reviewed for regulatory approval. If it gets the all-clear, investors will get the chance to tender their shares in the first quarter of 2025. Ofcom also plans to publish its consultation earlier next year, with a decision in the summer.
The complicates the position of long-term investors, some of whom have already voiced their opinion that the offer is too low. The improved odds of USO reform would only cement that sentiment.
But Křetínský’s use of a tender offer means he can set his threshold for success as low as just over 50 per cent of the register. Křetínský has just over half that amount himself.
The support of long-only funds may be questionable but arbitrageurs are near guaranteed to tender in favour, says Mark Kelly of MKP Advisors. Those now make up a tenth of IDS’s disclosed register and more likely represent 15 per cent. That figure could rise to as much as 30 per cent of the total.
That would be enough to get Křetínský across the line and give him effective control. It leaves open the possibility that Křetínský could keep the business listed, perhaps dampening talk of him snatching a UK crown jewel on the cheap. However, he still needs to clear national security hurdles. Mail reform complicates an already knotty transaction for the Czech Sphinx.
andrew.whiffin@ft.com
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