Surprise, surprise: the proposed £3.6bn takeover of Royal Mail’s parent company, International Distribution Services (IDS), by a Daniel Křetínský-led bidding consortium will generate a fee bonanza for investment bankers, lawyers, debt-arrangers and assorted hangers-on. The grand total is £146m before VAT, with £89.1m falling on the acquirer and £56.9m on IDS, according to the formal offer document.
It’s a hell of a sum, and the most infuriating element is the £36m that IDS has allocated for “financial and corporate broking advice”. Why? Because that’s the portion that is supposed to reflect the depth, quality and seriousness of the IDS board’s consideration of the fairness of 370p-a-share terms. For such an advisory bill, shareholders might expect maximum financial detail on why the directors rolled over. Instead, in his formal letter to shareholders in the offer document, IDS chair Keith Williams merely served up a cut-and-paste version of his previous sketchy explanation for surrender.
Remember the force of the rejection of Křetínský’s initial shot in April at 320p. This line stood out as important: the offer didn’t take account of “the significant underpin of value through the group’s extensive freehold property portfolio [and] the pension scheme in material surplus”.
So what is the value of the freehold portfolio? At the make-your-mind-up stage, shareholders might expect to be told, but they will search the 140-page document in vain. Having raised property as a major consideration at the outset, IDS’s board has never mentioned it again.
Similarly, the board has offered no guidance on how shareholders should think about the £1bn accounting surplus, as of March this year, in the main Royal Mail pension scheme. The company can’t access the sum until the scheme is either wound up or transferred to an insurer via buyout, but one of those outcomes will probably happen eventually. So, while the current value of the surplus to the owner may not be £1bn today, one of those expensive City advisers must have modelled a few numbers. Again, though, the board has fallen silent on an issue it brought up itself.
Of course, Williams has other reasons for regarding 370p as “fair and reasonable”: the need for investment in Royal Mail; competitive threats; uncertainty over whether regulator Ofcom will agree to the company’s proposal for a reduced second-class delivery service; and, most of all, the fact that the offer represents a 73% premium to the share price before the fun started.
Yet IDS is best thought of as a sum-of-the-parts stock, which is how City analysts (many of whom are now gagged because their employers are advisers on the bid) always used to assess it. The biggest of those parts, even though it gets a fraction of the attention, is GLS, the very successful Amsterdam-based international parcels operation. The offer document revealed GLS is no longer expected to reach its previous target of €500m (£423m) of operating profit in 2026-27, but it is still a high-quality business that is the real underpin of the group-wide value. In the old days, it was commonplace to observe that GLS accounted for all of IDS’s stock market value.
One doesn’t have to make too many optimistic assumptions about progress at Royal Mail – now shooting for break-even in the second half of this financial year – to think 370p is less than a knockout price. As argued here previously, fund managers – with the honourable exception of the objecting Columbia Threadneedle Investments – should be asking more questions. A bid for an important UK company is getting minimal financial scrutiny (and the Labour party still seems terrified of saying anything that could be misconstrued as anti-business).
Mind you, the CWU union might also care to up its game. The other mystery is why the union thinks it stands a chance of getting Křetínský to gift “a serious stake” in Royal Mail to the workers post-takeover. Read the offer document: the bidder is merely “exploring” the idea of “potentially offering a form of employee participation”, such as a profit-share of unknown size. Unlike the fat fees for City advisers, it could hardly be more vague.
