Investors threaten Daniel Kretinsky’s bid for Royal Mail

Big city investors who account for more than a fifth of the shares in Royal Mail owner International Distributions Services (IDS) plan to vote against a £3.6bn bid from Czech billionaire Daniel Kretinsky, The Mail on Sunday has learned.

They have been told that the £3.70 per share offer recommended by IDS’s board seriously undervalues ​​Royal Mail if regulator Ofcom recommends changes to Royal Mail’s Universal Service Obligation. This ensures letters and parcels are delivered six days a week across the UK at a fixed price, which Royal Mail says is a drag on its loss-making business.

If Ofcom scraps the requirement to send second-class letters Monday to Saturday, it could generate an extra £300m in revenue for Royal Mail, sources say. Investors argue that such an outcome would risk IDS being sold on the cheap to Kretinsky, nicknamed the Czech Sphinx because of his inscrutability, as Royal Mail’s long-term prospects would be much stronger.

In this case, the initial offer price would be £4 per share, or up to £5 based on recent takeover premiums in the UK, investors insist.

Chairman Keith Williams and the rest of the board would have a fiduciary duty to review their recommendation, they added.

The IDS offer is one of the major industrial challenges facing Keir Starmer’s government.

Labour’s manifesto committed its administration to “examine the deal in depth”. Trade Secretary Jonathan Reynolds is expected to invoke his powers under the National Security and Investment Act next week and “call for the deal to be tabled” before Parliament recesses.

The Government has been under pressure from the Communications Workers’ Union to intervene and prevent the 500-year-old postal service from falling into foreign hands. Ideally, the union would have some form of partnership agreement as part of Royal Mail’s future.

The offer from EP UK, the vehicle chosen by Mr Kretinsky, will be largely financed by debt provided by a consortium of foreign banks led by BNP Paribas. The £3bn leverage, together with up to £2bn of debt already on IDS’s books, would severely limit investment in the postal service if the Czech bid were successful.

It is also unclear whether Kretinsky, who already owns 27 percent of IDS shares, would be able to raise his offer to a level acceptable to some institutional investors. The Czech, whose partner is Olympic diver Anna Kellnerova, also has stakes in Sainsbury’s and West Ham Football Club.

Ofcom boss Dame Melanie Dawes has a pivotal role to play. The regulator has been silent since April, when it laid out proposals for a review that would dramatically change the Universal Service Obligation.

If their proposals were accepted, the price of first-class mail would have to increase to maintain six-day-a-week deliveries, and second-class mail would be delivered less frequently.

Investors say they are in a race against time to save Royal Mail from a foreign raider. Last week, private equity firm Apollo swooped on Advent-owned logistics group Evri for £2.3bn. Evri, formerly called Hermes, could pose a direct challenge to Royal Mail in the parcel delivery space.

With Royal Mail in the UK struggling to fully embrace parcel tracking, it risks ceding its superior logistics capability to rivals cashing in on the online shopping boom. Institutional investors also recognise the value of the brand, as there are few high street companies that carry the title “Royal” in their name, let alone sport the King’s profile on their products.

In the end, though the government will not want to be seen presiding over the sale of a domestic asset to an irresponsible foreign buyer, price is likely to settle the matter, with the share register overrun by hedge funds and arbitrageurs.

Kretinsky’s commitments to maintain the service for five years would expire as the next election approaches and could be quickly rescinded, destroying a vital public service in the process.