Krétínský's Royal Mail Deal is Far from Over - Latest Global News

Krétínský’s Royal Mail Deal is Far from Over

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Czech billionaire Daniel Křetínský’s move to buy Royal Mail has received tacit approval. Keith Williams, chairman of owner IDS, said the board was “willing to recommend a takeover at a price of 370 pence per share” should a formal offer be made. Williams said that, with an equity value of £3.5 billion, the price fairly reflected the value of GLS, a profitable European delivery company, and Royal Mail in its current loss-making situation.

Maybe he’s right. Still, no one seems confident that this deal will happen.

In hesitantly nodding to the deal, Williams also sharply criticized the British government. He expressed regret that the government “did not see fit to engage in the reform of the postal service.” A deal would effectively pass the question of the company’s future to the government, which reviews takeovers under foreign investment rules. Last but not least, this could result in attention being drawn to overdue changes to the performance obligation.

If reforms are implemented, then this price seems low. Royal Mail currently has to deliver letters six days a week. Profits have plummeted in line with the volume of letters sent. Royal Mail made operating losses of around £300m in the year to March. Previous reform efforts have been defeated.

The latest proposals, submitted for consideration as recently as April, would move second-class delivery to three days a week and slow delivery of bulk business mail. Royal Mail believes this would increase profits by £300m a year. The result? A company worth more than the current asking price, well over 400p per share.

The combination of a government veto of a controversial takeover of vital national infrastructure and this valuation uncertainty is keeping arbitrageurs on the sidelines. Although some funds are waiting for a formal offering announcement to get involved. However, with IDS shares trading at around 320p, a rough calculation of the merger negotiations suggests a 60 percent probability of completion. The numbers are clouded by the possibility that the prospect of a takeover will finally bring movement to Royal Mail’s commitments.

That would cause investors to look for a higher price. Křetínský, who already has a 27 percent stake, would still benefit – and save himself the hassle of a union showdown and a tricky restructuring. He has already committed to recognizing unions, protecting current workers’ rights and not leaving the UK.

A reform of service obligations, similar to that in European markets, could negate the need for politically sensitive intervention by this or the next government. An election in Britain this year could slow progress even further. This business involves significant risk of failed delivery.

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