When the board of Royal Mail’s parent company rolled over in May and recommended a £3.6bn takeover offer from a Daniel Křetínský-led bid vehicle, one reason it gave was “significant uncertainty” around regulatory reform.
That was a fair description at the time of Ofcom’s leisurely approach to reviewing the universal service obligation (USO), the requirement on Royal Mail to deliver nationwide six days a week at a uniform price. Even as letter volumes plunged, the regulator had danced around the question of reform for half a decade and, even in review mode since new year, still wasn’t being clear about what it might accept.
But Keith Williams, the chairman of International Distribution Services (IDS), could not make the same bleat about uncertainty now – at least, not so definitively. Ofcom has spoken and – hallelujah – there’s a decent chance Royal Mail will get everything it wanted. Scrapping second-class letter deliveries on Saturdays is formally on the table, just as the company proposed. A final decision is due next summer. Remember the potential cost-savings Royal Mail talked about: up to £300m a year, which is more than small change.
Remember, too, that shareholders haven’t yet voted on the Křetínský bid. The deal is paused while the government scrutinises the potential national security risks in allowing a Czech billionaire and his 44% co-investors, J&T, to own a key bit of UK economic infrastructure. So there is time for IDS shareholders to kick up a fuss on the essential question of whether 370p a share is a fair price at which to flog the owner of the national postal service. They should protest. As argued here previously, Williams & co capitulated to their awkward 27% owner too cheaply and at the wrong moment.
The strong whiff of USO reform should prompt a fundamental rethink. The cost savings could be genuinely transformative in the context of a company that, after a bitter year of strikes, is only now implementing changes to working practices. So look beyond the strike-afflicted year of operating losses of £348m, and consider that Royal Mail is a business where small shifts, percentage-wise, in fixed costs can make a big difference to the bottom line. Annual turnover is almost £8bn. A 3% operating margin should not be impossible in time.
Then there’s the fact that the big value within IDS lies in GLS, the very profitable Dutch logistics company. The operation was having a slightly tougher run in the group’s last set of numbers, but nobody doubts its long-term quality. Also recall that IDS itself, when it was resisting Křetínský’s lower offers, used to shout about “the significant underpin of value” from having an “extensive freehold property portfolio” and a pension scheme with “a material surplus” of £1.02bn. One can do sum-of-the-parts valuations on IDS and get close to the offer price of 370p with little effort.
It is true, of course, that the shares were languishing at 214p before Křetínský showed his hand, but the board of IDS, before its U-turn, called it correctly when it said the Czech Sphinx’s timing was “opportunistic”. A so-so price agreed in the spring may look out of date by the time a vote happens.
Columbia Threadneedle Investments, with a 5% stake, was alone in the fund management world in arguing that 370p “undervalues the business and doesn’t fully reflect its long-term intrinsic value”. It’s about time other active (allegedly) major fund managers on the IDS register (think Redwheel and Schroders) told us what they think.
Selling Royal Mail to a foreign billionaire waving a few time-limited pledges of good behaviour always felt bizarre in its own right. But doing so when USO reform is in sight would be pathetic.