Decisive moment in battle for Royal Mail: new regulations threaten ‘Czech Sphinx’ deal

As the Christmas season approaches, Royal Mail joins M&S, Sainsbury’s, Aldi and others in the advertising battle for Christmas revenue.

The British postal service is involved in an existential struggle.

Owner International Distribution Services (IDS) is under intense regulatory scrutiny following the board’s decision to sell itself to Czech billionaire Daniel Kretinsky for £3.6bn in a debt-fueled takeover.

In parallel, Royal Mail is in a fight to the death to compete in the value parcel market as it seeks to fulfill its long-term contracts with Amazon and other online merchants.

Finally, it has discovered that customers demand reliable and accessible tracking.

They are tired of standing in line at post office counters behind citizens seeking all kinds of services, from passports to banking services. It’s following other delivery companies by installing drop-off and pickup lockers in convenient locations.

Perhaps best of all, Royal Mail is promoting the services of its iconic red vans, packed with a royal code, ready to collect and deliver to your door.

The fate of the job is among a myriad of industrial challenges – including the viability of Thames Water and the future of Chinese-owned British Steel – facing the Labor government.

At the heart of the dilemma for Business Secretary Jonathan Reynolds is whether the sale of IDS to the ‘Czech Sphinx’ – as Kretinsky, 49, is known – and an obscure group of Slovak investors can be shown as a triumph of foreign investment.

Alternatively, allowing such an asset to fall into foreign hands, possibly cheaply, will be seen as a betrayal of its heavily unionized workforce, the King and the UK’s heritage.

A series of regulatory interventions brought the city’s normal procurement schedule to a screeching halt. The Government must present its evaluation of the offer on Friday under the terms of the National Securities and Investment Law.

The date is not fixed because the stopwatch can be stopped at any time if the Commercial Department or the security services want to intervene.

Kretinsky and his group, EP, are deeply involved in the national security process and provide additional data.

But the investigation is opaque and potential buyers of the Royal Mail owner are understood to have very little visibility.

There is some concern that markets are beginning to recognize that the offering carries more political risk – despite the large strategic stake – than previously thought.

Just examining the offer document should raise alarm bells given the layers of debt, mainly supplied by a group of foreign banks.

The financing consists of a medium-term credit facility of £1.1 billion, a bridging loan of a further £750 million, a further bridging facility of £500 million and a multi-currency loan of £500 million.

All of this on an IDS balance sheet already burdened with debt of around £2 billion that must also be borne by buyers.

The significant premiums and fees that will apply mean that none of this is cheap money.

Some may see it as reminiscent of the complex financial structures that have made Thames Water a nightmare for Whitehall.

Since Kretinsky got permission to buy his 28 percent stake, a lot has changed. The workers are in charge and full ownership is a very different situation than a dominant shareholding.

Authorization on national security grounds would be ironic, since the postal service was born in Tudor times as the “king’s messenger,” allowing Henry VIII to deliver secure messages to military officers.

Of equal importance to the IDS board and investors is Ofcom’s review into the future shape of Royal Mail, and in particular the Universal Service Obligation (USO) which requires first class letters to be delivered throughout and across the country six days a week. .

With postal volumes dropping like a stone – from a peak of 20 billion letters a year in 2004-2005 to 7 billion now, and approaching 4 billion in the next year or so – the current economic model has become unviable.

This is one of the reasons why Royal Mail has increased the price of a first-class stamp three times in 2024, with last month seeing a rise from 30p to £1.65p.

Ofcom’s review goes much further and, if ever approved, could totally change the economy.

In essence, the USO is suspended for second class deliveries, which would be delivered every few days without any guarantee.

But a first-class premium service, at a commercial price, would be established that would ensure next-day delivery, reintroducing the reliability of the past.

Ofcom is not running. He is conducting more market research to understand a better public and business response to the sweeping changes at OSU.

The results of that work will not be known until early 2025, and even then the review will not take place.

Ofcom chief Melanie Dawes will have to decide whether the proposals need to be amended and, crucially, reveal a range of pricing options.

Reynolds will then have to make decisions about the political and economic consequences – in terms of inflation – of far-reaching price changes.

A generous deal giving Royal Mail much more flexibility could put the IDS board in a difficult position. The bidding schedule may have expired, but the sale price could significantly undervalue the company.

A group of up to 20 percent of outside investors could well consider the offer price inadequate, causing chaos on a board already under fire for failing to get a better price.

The Czech Sphinx is sinking deeper into a regulatory and governance quagmire.