Debt-driven Royal Mail deal puts vital public service at risk, says ALEX BRUMMER

There are many reasons to oppose the “Czech Sphinx” bid by International Distributions Services (IDS), owner of Royal Mail.

These include public interest, the fragile knowledge of potential buyers Daniel Kretinsky and his partners, the impact on the workforce and rewards to executives of large companies who failed to manage the future of the organization.

The most important thing for investors is an overall price of 360 pence per share, which is not good enough.

Financing arrangements also deserve serious scrutiny. Agreements between public and private entities are destabilising and opaque, as the Bank of England points out in its recently published Financial Stability Report.

It warns that the widespread use of leverage makes private equity-owned companies “particularly exposed to tighter financing conditions.”

The consequences have been there for all to see, both at grocer Asda and at Thames Water.

Private equity has been particularly active in the UK and the Bank notes that around 15 per cent of corporate debt is committed to such deals. It has a high degree of concentration in finance, insurance, professional services and communications.

The Royal Mail is the country’s oldest and most established form of communication and widely used by HMRC, the NHS and returning officers dealing with elections.

The bid for IDS is largely financed by debt. Lenders BNP Paribas, Citibank, Societe Generale and Unicredit are all foreign, surprising given that the asset at stake is British.

It may well be that in the current high interest rate climate UK lenders feel they have more than enough exposure to private equity style deals.

The acquisition will be funded by a £1.1 billion medium-term facility, a £750 million bridging loan, a £500 million bridging loan and a £500 million multi-currency loan.

All this in an IDS balance sheet already weighed down by a debt of about 2,000 million pounds that the buyers will also have to assume. The high premiums and commissions that will be applied mean that none of this is cheap money.

The question is where the investment money will come from to modernise, maintain staff, maintain a UK headquarters and meet the universal service obligation in a shrinking postal market without substantial price increases.

It’s clear that Kretinsky and company believe there is cash to be made from property sales and development, but that doesn’t happen very quickly.

It is hugely disappointing that the board, led by Keith Williams, has failed to extract more forensic details about the plans from Kretinsky and his Slovak investment banking colleagues at J&T, given the company’s heavy debt load.

They should listen to the Bank of England’s Financial Stability Committee.

It calls for more detail on valuations and overall leverage levels in private takeovers, which would reduce vulnerabilities in a sector where risk management among banks needs to improve.

The proposed new ownership structure for Royal Mail is desperately unstable for a vital public service.

Green indicator

Labour’s energy tsar Ed Miliband might well learn a few economics lessons from BP before he launches a green Britain.

CEO Murray Auchincloss recognizes the cost to investors and the company’s future of rushing to build carbon-free fences.

It is pausing investments in renewable energy, focusing on acquisitions and new drilling for oil and gas, and moving key personnel away from green projects.

BP is paying dearly for the carbon-free programme of its predecessor Bernard Looney. Its share price has plunged 12% in five years. America’s biggest beast, Exxon, which has doubled down on carbon-based fuels, is up 50%.

Strong punch

It hasn’t been a good week for Emma Walmsley as she looks to restart GSK.

The NHS chose Pfizer’s respiratory vaccine against RSV over the more expensive and effective GSK vaccine.

Now the United States Center for Disease Control has stopped recommending the GSK vaccine for those under 60 years of age.

Shares fell sharply. All this before Delaware courts are set to rule on whether the ulcer drug Zantac may have contributed to some forms of cancer.

Hard times.