Will the Royal Mail still be ‘royal’ if it is owned by a Czech billionaire?

Will the Royal Mail still be “royal” if it is owned by a Czech billionaire? That’s not to attack Daniel Křetínský, whose company, International Distributions Services, already owns 27 per cent of the company and is bidding to buy the rest.

While the deal has to get regulatory approval, it has been accepted by the Royal Mail board so, in some form or other, looks like it’s going through. But a lot of people here are going to wonder whether it is really such a great idea having so many UK enterprises owned by foreign entities.

It hasn’t turned out very well for Thames Water, and while we are quite capable of creating our own disasters – look at the Government-owned Post Office – even the enthusiasts for Britain being “open for business” must wonder whether the country isn’t a little bit too open sometimes.

What UK investors can’t see

So why is this happening? Why do foreign business owners see opportunities that UK investors apparently can’t? There is no easy answer, but we can pick out some elements of the puzzle.

The starting point is that UK assets are cheap by world standards. That is a huge generalisation of course, but there are objective measures of the value of companies that support this view.

The simplest of all is the price/earnings ratio of big companies on the stock exchanges, the ratio between the value of all the shares of the company and its annual earnings or profits. In very round numbers, shares in London have been trading at around 11 times earnings, while in Paris and Frankfurt they are 12 to 13 times earnings, and in New York it’s more than 20 times.

Now, you can argue that the prospects for US enterprises are better than UK or European ones, but even allowing for that, most analysts accept that London-quoted companies are undervalued.

Unusually open

Just why that should be so is hotly debated. Part of the explanation is that British pension funds and insurance companies don’t invest in British firms, and that has a lot to do with regulation and taxation. But there is no debate about what has happened. Back in 1997, they held nearly half the market. At the end of 2022, the Office for National Statistics reported that was down to 4.2 per cent. Instead, it is overseas holders who have bought them, owning 57.7 per cent of the market.

Another part of the story is that the UK is unusually open to foreign investors. Take something as basic as London buses. Get on a number 30 and it is owned by a Singapore enterprise called ComfortDelGro. Take a 19 and it is owned by Arriva, which in turn is owned by the German rail operator Deutsche Bahn, except that it is selling the business to a private equity group called I Squared Capital. If you are on a 13, the operator is RAPT Dev, which stands for Régie Autonome des Transports Parisiens. They run the Paris bus and metro network.

There is nothing wrong with this, but most other countries don’t operate in this way.

Market solutions

Why should we be like this? It is partly that we have a particular tendency to look for market solutions to problems, and in the short run at least, this seems to offer better (or at least cheaper) outcomes. This is cross-party. It is true that the whole movement was started under Margaret Thatcher’s successive Tory governments from 1979 onwards. But it was carried much further by Tony Blair and Gordon Brown, and no one could accuse the current Mayor of London, Sadiq Khan, chair of Transport for London, of being a slave to market forces.

Before you bridle at the extent to which UK business is owned by overseas entities, consider something else. Britain owns almost as many assets abroad as foreign entities own here – we were in surplus in 2016. We are not really aware of that. For example, if you stay at an InterContinental in America, a Crowne Plaza or – if you are sticking to a budget – a Holiday Inn, your host is IHG Group, headquartered in Windsor, a six-minute walk from the castle. Or to take another example, the world’s biggest catering company is Compass Group, based in Chertsey, Surrey.

Beware of pushing back

So we will have to be careful if we are to push back too hard on cross-border purchases of companies. In any case, let’s also remember how foreign enterprises have rescued many UK ones that were in deep trouble. Think of Jaguar Land Rover, saved by the Tata Group of India. If we are not very successful at running a business, maybe it’s better to let someone else have a shot at it.

But there is an issue of national interest. What looks like happening in the coming years – and I think this will happen under any government – will be to try to distinguish between companies that are of genuine strategic significance, and those that are not.

We also need to learn to regulate more effectively, hugely important for a public service such as Royal Mail. So let’s extend a welcome to Daniel Křetínský, but let’s also make quite sure that we have a set of conditions and regulations that deliver the goods.

Need to know

I’m fascinated by the way in which the UK has managed to maintain its position of owning so many assets abroad – and only having a modest deficit on the stock of these assets – despite running substantial deficits every year.

The best source on both the stock and flow of funds into international investments is the annual balance of payments, the “Pink Book”, published every year. The most recent one came out last October, and only runs to the end of 2022, so it is inevitably rear-view mirror stuff, but it gives a helpful long-run view none the less.

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Most of the attention is inevitably paid to what happened to the current account, the flows in and out in the previous year. For example, in 2022 this was £78bn, just over three per cent of GDP, not helped, by the way, by the surge in gas prices, following Russia’s invasion of Ukraine. We buy in a lot of gas: fuels were our second biggest import. As always, we rely on a surplus on trade in services to offset a deficit of trade in goods.

It is understandable to focus on the current account because it is more immediate, but the capital account is just as interesting. Both assets and liabilities were just over £14,000bn, with liabilities £244bn larger than assets. That gap decreased in the year due to currency revaluations or, in the case of the pound, a devaluation mainly against the dollar.

In sterling terms, if you devalue, anything denominated in foreign currency will go up in value, even though in local currency there has been no change. The reverse obviously happens if the pound goes up – but you can’t keep devaluing forever.

That leads to a troubling thought. If UK assets are undervalued, as most people accept they are, and if there is a revaluation of those assets, that will make our capital position more negative. If, in addition, the pound is undervalued, and on purchasing parity terms it probably is, then that will compound the damage to the capital position.

So I could see a situation in which our capital account deteriorates quite sharply, driven paradoxically by an assessment by international investors that the UK is doing rather better than they thought. This is not a catastrophe, but it is a worrying signal that we are living above our means and relying on foreign investors to plug the gap.

Mark Carney, former governor of the Bank of England, famously used the phrase that Britain was relying on “the kindness of strangers” to support the pound and the economy, given its persistent current account deficit. That was harsh, and actually rather damaging. Things have turned out much better than he expected. But the point does stand. You don’t want to have too big a current account deficit, for that will eventually undermine the capital account too.