International Distributions Services (IDS), the owner of Royal Mail, may have agreed to the £3.5bn takeover but the future of Royal Mail is far from signed, sealed and delivered.
Shares in IDS rose over four per cent on Wednesday as the market welcomed the news that the board had accepted a bid from EP Group, owned by the ‘Czech Sphinx’, Daniel Kretinsky. But the stock is still trading around 334p, far south of the offer price of 370p, suggesting the City does not view the takeover as wrapped up.
Elsewhere in the City the news has been met with mixed reaction. Some analysts have been quick to cast doubt over the deal, saying it could be defeated by regulatory barriers.
“Now comes the hard part in getting the government to approve the deal,” said AJ Bell investment analyst Dan Coatsworth.
Under the National Security & Investment Act (NSIA), the government potentially has the power to block the deal if it concludes that national security could be at risk. A foreign takeover might raise concerns about the security and continuity of critical postal and communication services.
Liberum analyst Gerald Khoo wrote that the investment firm believes the government will block the takeover, saying it sees government clearance under the NSIA as a “major hurdle”.
Khoo said: “Our expectation is that an appropriate review of the proposed takeover could be lengthy. Even if that were not to be the case, any decision would fall foul of the pre-election prohibition on making long-term decisions that would tie the hands of the next government.”
What has government said about Royal Mail deal?
Chancellor Jeremy Hunt has said any takeover bid for Britain’s Royal Mail would be subject to “normal” national security scrutiny but it would not be opposed in principle. As Coatsworth has pointed out though, “his view might soon be irrelevant.”
“The big question is which political party is going to be in power to decide, given the general election is only five weeks away,” he said, adding that takeovers can take a long time to complete.
With the polls all reading a cold temperature for the Tories – although this could still change – the decision may be up to Labour.
Jonathan Reynolds, Labour’s shadow business secretary, has welcomed assurances that Royal Mail will “retain its British identity and safeguard its workforce with no compulsory redundancies. Labour in government will ensure these are adhered to.
“While the Conservatives have ignored Royal Mail, Labour will ensure that it delivers once again for customers and postal workers,” he added.
EP Group’s offer is understood to have agreed to the required extra commitments to keep Royal Mail’s brand, rule out compulsory redundancies and keep the company headquartered in the UK, along with its tax residency.
Kretinsky has said: “The EP group has the utmost respect for Royal Mail’s history and tradition, and I know that owning this business will come with enormous responsibility – not just to the employees but to the citizens who rely on its services every day.”
But, at the moment, Royal Mail is struggling to hit its delivery targets as it battles heavy losses and falling letter volumes. Last week, communications regulator Ofcom launched an investigation into the service’s failure to deliver enough post on time.
IDS has called for “urgent reform” of the universal service obligation (USO) that governs Royal Mail, arguing that cutting its delivery days down could save it hundreds of millions of pounds. Ofcom is currently reviewing the proposals.
Peel Hunt analyst Alexander Paterson said the noise from both main political parties on USO reform is “not encouraging, with neither side really recognising the magnitude of the change required.”
However another analyst told City A.M. that while it is true the deal may face some regulatory resistance, the alternative situation may be worse for whoever next takes over Number 10.
The last thing any new government wants is to have to cough up to ensure the post arrives on time, they said.
It may mean the takeover is delivered through without too much delay.