Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Daniel Křetínský’s reputation for mystery suggests he is difficult to understand. The Czech billionaire’s investment approach seems pretty straightforward: target very well-known, very underperforming companies.
Royal Mail owner International Distributions Services, which the “Czech Sphinx” has approached with a takeover offer, certainly ticks the boxes. IDS shares jumped on Wednesday. Still trading almost a quarter below their 2013 privatisation price, the stock reflects the burden that an obligation to deliver letters six days a week has become.
For shareholders, including Křetínský who owns 27 per cent, much rests on the outcome of a plea to regulator Ofcom to lessen the universal service obligation, getting costs down and profits up. Even so, the benefits would not be immediate. For Křetínský, whose approach was rejected, unlocking value would surely require more radical surgery, breaking off the group’s international delivery business GLS.
That prospect would bring with it labour angst and political controversy, for a company whose initial public offering prompted a review of why it was sold so cheaply. Not any more. The business looks unsustainable in its current form, with letter volumes down to 7bn a year from its 20bn peak two decades ago. Suggested changes to its service obligations, such as a move to five-day or three-day per week deliveries, could save Royal Mail between £100mn-£200mn and £400mn-£650mn a year. None have proved acceptable to regulators.
The latest (perhaps more palatable) tweak being proposed is to move second-class deliveries to just three days a week and slow delivery of bulk business mail. IDS thinks this might reduce costs by £300mn a year. The figure is broadly in line with the operating loss that analysts expect at Royal Mail in the 12 months to March this year. Those losses were already expected to move to break-even over the following year.
Meanwhile, international delivery division GLS is expected to make £350mn in operating profits next fiscal year. That unit makes similar operating margins to Deutsche Post DHL. But at 9 times forward earnings, IDS as a whole trades at a 30 per cent discount. Even after the jump on Wednesday, valuing GLS in line with rivals would suggest a sale price of £400mn over the market value of the entire IDS business.
That still only implies a price of 300p a share — below the 330p IPO price and a sum that would in effect involve getting Royal Mail for free. The UK government in 2022 called off a national security probe into Křetínský’s stake building. This time it might want to send a different message.
Read the full article here