The most dramatic aspect of Wednesday afternoon’s statement from International Distributions Services (IDS) is that the company’s board has indicated that it is minded to recommend Daniel Kretinsky’s offer to shareholders.
That speaks to the depth of discussions that have evidently taken place between IDS and Mr Kretinsky’s EP Group since his original offer was rejected in April.
The 15.6% “bump” – in the jargon – in EP Group’s offer is quite significant, as these things go, taking it to a level that is presumably satisfactory to IDS chairman Keith Williams and his colleagues.
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The universal service issue
On this occasion, though, the price is likely to have been the least contentious part of the negotiations.
As the IDS statement makes clear, EP Group agreed during the negotiations to offer “contractual undertakings to protect key public interest factors and recognise Royal Mail’s status as a key part of national infrastructure”.
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That is likely to include a pledge to maintain the “universal service” – a legal obligation for Royal Mail to deliver letters to all addresses in the UK six days a week.
It is something – as IDS noted with frustration on Wednesday – it has been seeking to reach an agreement with the government on for four years. The collapse in letter volumes means the one-price-goes-anywhere service for the entire UK is proving increasingly expensive for Royal Mail to offer.
To that end, IDS has already done a lot of the heavy lifting for its would-be buyer, as it has already put forward proposals for a financially sustainable universal service in the future – which EP Group has said it will stick with.
It has also agreed to offer contractual commitments to protect employees’ current rights and continue to recognise the existing unions of both Royal Mail and GLS, Global Logistical Services, the international parcel delivery business which is regarded as the jewel hidden in IDS.
Matters to be resolved and questions to answer
These undertakings should, Mr Kretinsky will be hoping, be enough to assuage concerns among Royal Mail’s customers and employees should the takeover go through.
There are other matters yet to be resolved.
The IDS board pointed out it is still negotiating with EP Group over how long the undertakings and contractual commitments it is prepared to make to the government.
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It also wants assurances from EP Group to maintain an investment grade rating profile of IDS.
This latter issue is pretty crucial: IDS’s credit rating of BBB is on negative watch with the ratings agencies. A downgrade would jeopardise IDS’s ability to raise money from the markets and put the stability of Royal Mail, in particular, at risk.
So there are still big questions that EP Group has to answer.
But why?
What still mystifies many in the City is what Mr Kretinsky, who is also an investor in West Ham United FC and Sainsbury’s, among other assets, wants with the whole of IDS.
GLS is certainly an attractive asset but Royal Mail, with its traditionally militant unions and onerous regulatory obligations, is regarded as a much less attractive business.
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The betting has always been that, at some point, IDS would break itself up – attracting numerous buyers for GLS while leaving Royal Mail, in the absence of a loosening of its regulatory obligations, to wither on the vine.
Mr Kretinsky is clearly betting that he can own both while sticking to the obligations Royal Mail has to its regulator.
Hurdles to be cleared
He should succeed in avoiding further scrutiny under the National Security and Investment Act since, as long ago as October 2022, it was accepted that there was no problem in him being a shareholder in IDS – and by extension Royal Mail – on national security grounds.
But the commitments he has made to the board of IDS will doubtless be something Ofcom – and maybe even the Competition & Markets Authority – will wish to study carefully.
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Many of IDS’s long-suffering investors, meanwhile, will be delighted. IDS shares have only traded at or above the 360p-a-share offered by Mr Kretinsky for 16 of the last 67 months and the last time they did so was in April 2022.
Many will doubtless jump at the chance to accept this offer.
