The City is underpricing how likely a Kretinsky-owned Royal Mail is
British post for British doors, then, even if it arrives three days late? That certainly seems to be the Square Mile’s assumption, with shares in Royal Mail owner IDS only nibbling up 4 per cent or so yesterday despite news of a bid far north of its existing price. The working theory is that Daniel Kretinsky’s bid won’t get past regulators or government. We aren’t so sure.
The investment case at IDS is fairly straightforward. One part of its business, delivering parcels, makes a bucketload of money and is widely understood to be on its way to greater growth.
The second part of its business, Royal Mail, is obliged to drop off letters to 20-million plus households six days a week, just as letter volumes fall off a cliff. Unsurprisingly, the finances of this second bit are in notably less healthy shape.
Kretinsky’s bet is twofold: one, he can make the first bit more profitable, and two, that eventually regulators will release some of the grip it has on the Royal Mail, and allow it to turn into a business that whilst unlikely to rake it in for decades to come is at least not a dead-weight on IDS’ growth at large. The City is betting, seemingly, that he won’t get anywhere near either of those tables, and that government will block the deal.
But… why? Should regulators not change the rules on universal service obligation, then Kretinsky would be obliged to meet them. It is not as if performance can get much worse: Royal Mail as it currently stands is missing its targets with the regularity of an England penalty taker. Labour, should they take power, would also have to think hard about what blocking an EP Group takeover would look like to global investors: protectionism rarely wins friends.
The collective wisdom of markets is a powerful force. But to be frank, we see little reason why Kretinsky shouldn’t soon have his prize asset.