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Shareholders have demanded answers from Royal Mail after the UK postal operator wrote down 85 per cent of the value of two recently acquired US parcel delivery businesses, adding to doubts over its international expansion.
Royal Mail paid $103m (£80m) in total for Golden State Overnight, which it acquired in October 2016, and Postal Express, bought in April 2017. Last week it revealed it was writing down their value by £68m. Both US businesses were acquired through Royal Mail’s international parcels division, GLS.
Shareholders have asked for meetings with the company’s management to discuss its strategy as it continues with a North American acquisition spree, paying C$360m (£213m) for Dicom Canada.
The non-cash impairment was disclosed last week when Royal Mail reported that its half-year profits had more than halved, sparking a sell-off in the stock that led it to close below the 2013 privatisation price for the first time.
Two top-20 shareholders said they wanted more information from management on the company’s strategy in the wake of the disappointing results and the writedown.
Another said: “Shareholders are not especially happy with the company.”
The events piled more misery on Royal Mail, which this year has suffered an investor revolt over excessive boardroom pay and issued a damaging profit warning after failing to meet productivity and cost savings targets at its core UK operation.
Royal Mail described the US writedown as a “prudent” measure that was largely against goodwill — the amount paid for an acquired company in excess of the net assets, and essentially an estimate of future earnings.
The company said this was due to a change in operating model at the US businesses, which are both focused on the west coast and are being merged into a single operation. Instead of employees who own their own vehicles, it will use an “independent contractor” model with third-party companies that have their own drivers.
Royal Mail reported the two US businesses made an operating loss of $8m in the first half of the year.
Shane O’Riordain, director of corporate affairs at Royal Mail, defended the “sound strategic rationale” for the acquisitions.
“For us, an interstate network on the west coast of the US makes strong sense. From our perspective the transition will take time, but it will be successful,” he said. “Like other major companies, we always engage with our shareholders in detail following our results. We are doing just that right now.”
Other factors behind the impairment were rising labour costs, savings taking longer to materialise and the expense of integration and expansion into two new states. Despite this, there was “good growth” in revenues at GSO.
However, David Kerstens, analyst at Jefferies, said the writedown raised questions around strategy at GLS, which had been an “engine of growth” for Royal Mail in recent years.
The unit has expanded through a number of overseas takeovers in mainland Europe and North America and now accounts for more than one-third of group revenues.
“M&A in the US hasn’t worked out well for many European postal operators,” said Mr Kerstens.
Royal Mail says its west coast operation offers a faster and cheaper service than rivals such as FedEx and UPS.