Royal Mail £3.57B Takeover Hangs on New Government

The Royal Mail has agreed to a £3.57 billion takeover by Czech ownership as the controversial acquisition aims to alleviate debt issues, but questions remain around post-transaction operations.

New Leadership, New Direction

In late May, International Distribution Services (IDS) agreed to sell Royal Mail to Daniel Kretinski, a notorious Czech billionaire and businessman. However, the share price has not changed much since then, reflecting the broad expectation in financial circles that the deal will not be finalised. Royal Mail enjoys substantial political support as an iconic British brand, with the previous government pledging a close review of any sale. As such, addressing this transaction will be one of the primary issues for the new Secretary of Business, Jonathan Reynolds.

Beyond potential concerns over a foreign entity owning Royal Mail for the first time in its over 500-year history, union workers worry the change in ownership could lead to downsizing, while customers fear services may become limited. These concerns are understandable given the significant financial challenges facing IDS's postal division from high debt and costs. Shifting correspondence trends toward digital formats have reduced physical mail volumes. While parcel demand has increased as online shopping rises, IDS has moved these operations under its separate GLS brand.

Deal, Cost Cutting or No Deal

With the parent company agreeing to the sale, any major obstacles to completing the deal would likely come from the government. As Kretinsky does not own competing firms, the purchase is unlikely to trigger competition authority issues. The new Secretary of State for Business, Energy and Industrial Strategy has not yet commented officially on the merger, but in his previous role as Shadow Secretary, he did urge respect for labour agreements. Other than this, the government's position is currently unknown.

Kretinsky is already a major shareholder in IDS and presumably would divest if the deal does not proceed. On the other hand, the wide-ranging commitments to allay concerns over major operational changes implies a strong commitment to the company in some form. However, the deal implies a 5-year period where current operations would be maintained, such as union contracts and six-day-a-week delivery service (in Continental Europe, mail is usually delivered only Monday to Friday). Thereafter, changes to optimise the service may be implemented. Now the ball is in Secretary Reynolds' court to see if the deal does actually go through, enabling the IDS share price to rise to the offer price before the September board meeting.

IDS in Accelerating Trend

In mid-May, IDS moved beyond its base price trend, taking the stock further from its last October swing low at 175 GXB. Considering the measured-move extension from the breakout point of 300 GBX, the stock could reach 370 GBX next, exposing 400 GXB and beyond. On the other hand, if IDS falls back below its regional round support, it could drop to 250 GBX, with stronger support lying at 215 GBX.

Source: SpreadEx / IDS

Key Takeaways

Royal Mail agreed to a £3.57 billion takeover by a Czech billionaire to alleviate debt issues, potentially marking its first foreign ownership in over 500 years. However, concerns exist about potential job losses and service reductions. The new Secretary of Business must now review the deal amid worries over maintaining six-day delivery and union agreements long-term. With few regulatory hurdles expected, the outcome depends on the Secretary's assessment of the buyer's commitments to current operations over five years versus the need for long-term reform.