Royal Mail deal defies nationalist anti-M&A trend
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Yawen Chen
LONDON, May 29 (Reuters Breakingviews) -Daniel Kretinsky seems to have delivered what the next UK government will want. The Czech tycoon’s agreed 3.6 billion pound ($4.6 billion) takeover of Royal Mail owner International Distributions Services (IDS) IDSI.L on Wednesday secured a nod from the opposition Labour Party, which leads the polls ahead of a July 4 election. That’s despite the possibility of job cuts at the UK national postal service and a breakup of the wider group. It proves that there are exceptions to the prevailing nationalist anti-M&A mood.
IDS and Kretinsky’s bidding vehicle on Wednesday announced that they had agreed on the price, as well as a package of measures designed to win support for the potentially controversial deal. Financially, the terms are easy for the IDS board to recommend: the 370-pence-per-share offer is about 70% above the company’s undisturbed trading price.
And the legally binding concessions to ease government approval seem impressive too, at first glance. They include promises not to move Royal Mail’s headquarters or tax residency, as well as pledges to only take assets or money out of that business if its net debt is below 2 times EBITDA afterwards. For comparison, the wider group’s current leverage is about 3 times trailing EBITDA. Nor can Kretinsky split out the GLS logistics division, which is IDS’s most valuable unit, if doing so would leave Royal Mail with net debt greater than twice its EBITDA.
Such change-of-control restrictions are uncommon. And many of the undertakings come with a five-year time horizon, which is longer than is typical. For example, in the 2021 acquisition of UK aerospace and defence engineering group Meggitt by U.S. firm Parker-Hannifin, the parties agreed to keep the business’s UK operations in place for one year only. On Wednesday, the Labour Party said in a statement that it welcomed Kretinsky’s assurances and would ensure they are adhered to if elected.
Still, the political support arguably looks more surprising after factoring in some of the conspicuously missing items in the pledges. For example, Kretinsky has said that Royal Mail will recognise the Communication Workers Union, which represents postal workers, but he has made no binding long-term promise to keep the number of employees unchanged, as the Meggitt deal did. And Wednesday’s statement implicitly recognises the possibility of a post-deal breakup of IDS, while explicitly stating that Kretinsky will partly use debt to fund the deal. For all the promises, then, Kretinsky could still be able to do a leveraged breakup of the company that owns a key national asset, with job cuts further down the line.
Investors aren’t totally sure the deal will succeed, since IDS’s share price is about one-tenth below the offer. But a big chunk of that will reflect the anticipated delay until investors get the money. As governments take a generally more sceptical stance to sensitive takeovers, IDS looks like a notable exception.
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CONTEXT NEWS
International Distributions Services (IDS), the owner of Britain’s Royal Mail, on May 29 agreed to a 3.6 billion pound ($4.6 billion) takeover by a vehicle controlled by Czech billionaire Daniel Kretinsky.
The offer values IDS at 370 pence per share, including planned dividends.
The two sides said they had negotiated a package of measures designed to win government approval, including restrictions on taking cash or assets out of the Royal Mail division unless its leverage stays below a pre-agreed level. Those commitments have a five-year time limit.
Other commitments include maintaining the UK headquarters and tax residence of IDS and Royal Mail, and keeping staff salaries and benefits at least stable for two years.
The CWU, Royal Mail’s largest union, said it would meet with EP Group next week to seek a reset in employee and industrial relations, the restoration of postal services and further commitments on the future of the company.
“We will also be directly engaging with the Labour Party and other stakeholders to call for a new model of ownership for Royal Mail,” it said.
Jonathan Reynolds, the business spokesman for the opposition Labour Party, which is forecast to win Britain’s election on July 4, welcomed the assurances given by Kretinsky.
IDS shares were up 3.4% to 332.2 pence as of 0901 GMT on May 29, roughly 10% below the offer price.
Graphic: IDS share price compared with Daniel Kretinsky’s offer https://reut.rs/3Kjgznh
Editing by Liam Proud and Oliver Taslic
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