Two general elections ago, Labour was promising to renationalise Royal Mail. Now, in office, it is happy to see the ancient institution fall to a leveraged takeover bid from a private equity-style company that will have the power to set the price of a first-class stamp from Prague.
The decision is an outright gamble. Many European countries have privatised their postal services but there is a good reason why none have allowed ownership to pass overseas. Even in a digital age, businesses such as Royal Mail provide critical national infrastructure that has a social value on top.
Naturally, the boasts from government on day one were about the supposed robustness of the undertakings agreed with EP UK Bidco, the takeover vehicle owned by Daniel Křetínský, the multibillionaire Czech tycoon, and his 44% co-investors, J&T. And it is true there were welcome tweaks to the original version that was announced when the board of International Distribution Services (IDS), Royal Mail’s parent, rolled over in May and surrendered for 370p a share, or £3.6bn. The UK government will get a golden share in Royal Mail, for starters, to give it a permanent say in the governance set-up and tax location.
Yet other elements in the undertakings are laughably light. One restriction on dividends to EP merely requires Royal Mail to equal the score for on-time delivery of letters that it achieved last year – a period, note, for which it has just copped a £10.5m fine from the regulator for substandard performance.
Even with a loose formal cap on financial leverage, it requires a heroic suspension of disbelief to believe this is anything other than a debt-inspired deal in which Křetínský thinks his downside risk is limited by the quantity of freehold property within both halves of IDS – at Royal Mail and GLS, the Dutch parcels business. To make the debt gymnastics slightly less of a high-wire act, EP will be obliged to convert £600m of Royal Mail debt into equity, but, make no mistake, the debt structure here is aggressive. IDS had net debt of £1.9bn at its last balance sheet date, and EP has arranged £3bn of loans to fund the takeover.
From the point of view of UK customers, it is hard to see why Royal Mail’s performance should improve beyond what the company could have achieved under its steam with the help of reform of the universal service obligation (USO) that will come (probably) next year. Křetínský’s promises on investment are long on good intentions but short on hard commitments. There has been muttering about £400m to roll out 20,000 lockers in the UK to address the threat posed by InPost, but no mention of a timeframe for the project.
In the absence of better explanations, the buyer’s rationale for this deal looks to be the property portfolio (“extensive” and a “significant underpin of value”, said the board of IDS when it was briefly resisting the Czech takeover overtures); the £1bn surplus in the pension fund; and the growth possibilities at GLS in the Netherlands, which is where the real value within the group lies.
On the pension surplus, the Communication Workers Union’s apparent coup in getting Křetínský to agree to release a few quid for the benefit of posties may not be the negotiating triumph it appears. Other uses for the surplus, on the CWU’s telling, include “investment in Royal Mail”, which sounds suspiciously like a freebie for EP – an alternative to funding all the capital expenditure from its own coffers.
Any vague hope that IDS’s shareholders might shoot down the deal has probably evaporated since Rachel Reeves, the chancellor, cranked up employers’ national insurance contributions and landed Royal Mail with higher costs. So this is the deal we’re stuck with. The CWU’s enthusiasm is baffling (honestly, guys, just because you didn’t like the board of the quoted company, that doesn’t mean the alternative will be better) but the weirdest part of this transaction is the timing.
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Royal Mail has spent years appealing – with justification – for reform of the USO to reflect the plunge in the volume of letters since privatisation. Now the company is close to getting what it wanted in the form of scrapping second-class deliveries on Saturday, but is being flogged to a faraway owner with an outsized appetite for debt. Jonathan Reynolds, the business secretary, can rationalise the undertakings as a case of “working hand in hand with business” but the risks here are not evenly distributed. Křetínský has property valuations to fall back upon. Labour has no excuse if this punt goes horribly wrong.