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There are two reasons to be suspicious of the Daniel Křetínský-led £3.6bn takeover offer for the parent company of Royal Mail. The first is the suitability of the lead bidder and his 44% co-investors, J&T, which could be one for the next government. The other is purely financial: is the Czech billionaire offering a fair price for International Distributions Services (IDS)? Is 370p a share any good?
IDS is recommending acceptance, but there is a weirdness here. The directors’ rejection of Křetínský’s opening shot at 320p in April was pitched in such strong terms that one assumed chair Keith Williams, a boardroom heavyweight not scared of a corporate ding-dong, was digging in to resist his 27% shareholder.
Instead, May’s 15% improvement in terms – decent, but not otherworldly – prompted an about-turn. The leap from “highly opportunistic” and “significant undervaluation” (320p) to “fair and reasonable” (370p) needs a better explanation than any offered by IDS so far. For all the crises since privatisation at 330p in 2013, its shares have still spent more time above 400p than below. The initial City chatter in April, note, homed in on 400p as the level at which IDS’s board would be obliged to talk.
So, well done Columbia Threadneedle Investments, with its 5% stake. It is the sole big shareholder to protest. “The bid at 370p undervalues the business and doesn’t fully reflect its long-term intrinsic value,” it said a fortnight ago. “We believe that the management team has done a good job to turn the company around and additional equity value can be delivered over time for long-term shareholders.”
Consider how an imaginary defence document could go. First, IDS could say 214p, the price before the action started, should be ignored as a base valuation because it was depressed by special factors: the sleepy UK stock market; extra illiquidity as a result of Křetínský’s large holding; and uncertainty over the pace of regulatory reform in an election year.
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It’s not hard to imagine Royal Mail could generate 3% margins again; when turnover is almost £8bn, that’s serious money
Second, it would emphasise the £300m of annual cost savings if regulator Ofcom accepts a proposal for a reduced second-class service. There’s no guarantee Ofcom will agree to anything, of course, and, yes, Royal Mail has just had a strike-afflicted year of operating losses of £348m. But political breezes have definitely shifted on reform, and new working practices, the product of a peace deal with the CWU union, are only now being implemented. It’s not hard to imagine Royal Mail could eventually generate 3% margins again; when annual turnover is almost £8bn, that’s serious money.
Third, IDS could hammer home the value in GLS, its very profitable Dutch logistics company. In the past, City analysts have put standalone valuations on it as high as 350p a share.
Fourth – and this really deserves more attention – a defending board could expand on its line from April about “the significant underpin of value through the group’s extensive freehold property portfolio [and] the pension scheme in material surplus”. How much property could be turned into cash as Royal Mail sends more volumes through its shiny new mega-hubs? The company has never said.
As for pension surplus, “material” is the right description: it was £1.02bn, according to IDS’s last full-year report. Trustees run the scheme, of course, and, in any case, Křetínský’s EP Group would not be able to access a penny for five years under its undertakings. But the rules allow any surplus to be refunded to the company at buyout or wind-up, IDS confirms, and one or the other will happen eventually. Even if a future surplus is unknowable, £1bn is an attractive position today.
Where are the other big fund managers in the valuation debate? Schroders manages a 6.8% stake and won’t comment. Redwheel, with 6.3%, was vocally opposed to 320p but hasn’t opined on 370p. Nothing has been heard from top 10 shareholder Jupiter.
Given that the bid is structured to require 75% acceptances, even just a handful of objectors could make a difference. The relevant fund managers are all members of the brigade that normally sings the virtues of engaged experts who know companies intimately. They’ve had ages to ponder. They should say what they think.
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