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Czech billionaire Daniel Křetínský’s move to buy Royal Mail has received a tacit stamp of approval. Keith Williams, chair of owner IDS, said the board was “minded to recommend” a takeover at a price of 370p per share should a formal offer arrive. Williams said at an equity value of £3.5bn, the price fairly reflected the value of GLS, a profitable European delivery business, and Royal Mail in its current lossmaking state.
He may be right. Still, no one seems confident that this deal is going to happen.
In giving the deal a tentative nod, Williams also took a potshot at the UK government. He expressed regret that the government had “not seen fit to engage” on postal service reform. A deal agreement would in effect kick the question of the company’s future to the government, which vets takeovers under foreign investment rules. That, if nothing else, might focus minds on overdue changes to the service obligation.
Were reform to be delivered, then this price looks low. As it stands Royal Mail has to deliver letters six days a week. Profits have slumped in line with volumes of letters sent. Royal Mail made operating losses in the region of £300mn in the year to March. Past efforts at reform have been batted away.
The latest proposals, only submitted for review in April, would move second-class deliveries to three days a week and slow delivery of bulk business mail. Royal Mail thinks this would add £300mn a year to the bottom line. The result? A company worth more than the current price on offer, well in excess of 400p a share.
The combination of a government veto on a controversial takeover of vital national infrastructure, plus this valuation uncertainty, is keeping arbitrageurs on the sidelines. True, some funds wait for a formal offer announcement to get involved. But with IDS shares trading around 320p, rough merger arb maths suggests a 60 per cent probability of completion. Muddying the numbers is the possibility that the prospect of a takeover finally prompts movement on Royal Mail’s obligations.
That would leave investors looking for a higher price. Křetínský, who already has a 27 per cent stake, would benefit regardless — and save himself the trouble of a union showdown and tricky restructuring. He has already committed to union recognition, protection of employees’ current rights and no move from the UK.
Reform to the service obligations, similar to European markets, could negate the need for a politically dicey intervention by either this government or the next. A UK election this year may yet slow progress. This deal carries substantial risk of a failed delivery.
andrew.whiffin@ft.com
