The Times: What next for Royal Mail as the 'Czech Sphinx' circles

[Basildon Bond]

One City analyst’s view that the company’s privatisation was a poor deal for taxpayers has a new resonance today

https://www.thetimes.com/business-money ... -k2k7vhb6s

Robert Lea, Industrial Editor Monday June 10 2024, 12.01am BST, The Times

Eleven years ago, before the privatisation of Royal Mail, an analyst at Canaccord Genuity lobbed a small incendiary into the Square Mile. According to Graham Simpson, Vince Cable, the business secretary leading the Conservative-Liberal Democrat coalition’s sell-off, had got it disastrously wrong.

It was not because the privatisation of a national strategic asset encumbered by a universal service obligation, the introduction of postal competition and a militant trade union would be a disaster. Quite the reverse. Quest’s modelling suggested that the government was vastly underappreciating both the fundamental financial value of the business and demand for its shares.

Over the next few years Simpson was proved right, but the subsequent stock market rollercoaster brought Royal Mail to a point that it can’t deliver the post anywhere near on time, is in apparent structural decline and has a market value of less than two thirds its £3.3 billion, 330p-a-share flotation level of 2013.

Or at least had. Daniel Kretinsky, a Czech billionaire, has chanced his arm with a bid for the company, now renamed International Distribution Services, at barely the float price, an offer pitched at 360p plus 10p in one-off dividends that has brought the stock back above the 330p mark. It could take the centuries-old institution into foreign hands.

All of which, says Simpson, poses some fundamental questions. “The Royal Mail float should not be remembered fondly as a successful privatisation by shareholders or taxpayers,” he said. “Should Royal Mail have been privatised in the first place? And would the same decision be made now?”

In the beginning was the General Post Office, or GPO, although to be accurate the 17th-century creation of a universal postal system during the interregnum government of Oliver Cromwell had been preceded 140 years earlier by the work of Brian Tuke, an uncelebrated Tudor technocrat. Knighted and taking the title of Master of Post, he developed a network of roads and post houses, the machinery of government information, for Henry VIII.

Until 1969, the GPO was a department of state. Dropping the “General”, the Post Office became a statutory corporation. A hidden jewel in the crown began to shine, the old telegraph and telephone business evolved into British Telecommunications and in 1981 it became the flagship privatisation of Margaret Thatcher’s government.

Two decades later, Tony Blair began the process of dismantling the Post Office monopoly and introducing competition in the postal sector. After a short-lived time under the unhappy name Consignia, it was rebranded again as Royal Mail.

In 2008, Lord Mandelson, the business secretary, recognising the need for vast investment in the post office network and delivery service, launched plans for a part-privatisation and cash injection by bringing in a minority shareholder. Amid vociferous backbench Labour opposition, his plans foundered on an economic tide that became the global financial crisis.

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The Conservative-led government from 2010 resurrected the plan, arguing that it was not simply ideological dogma, as Labour had already set the ball rolling, and that a host of European countries had gone down the privatisation route. Reading between the lines, it would mean that hostilities with the Communication Workers Union would become someone else’s problem.

In 2012, the Post Office network was split from its symbiotic co-business Royal Mail delivery services. The former went on to be embroiled in the Horizon IT scandal. With regard to the latter, readied for sale, the huge deficit of the Royal Mail pension scheme was parked in the Treasury for the taxpayer to pick up the bill.

By the summer of 2013 ministers were running out of time, acutely aware that any delay in privatisation would butt up against the feverishness of political and public opinion before a scheduled general election.

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With the price set at 330p, Simpson put out his Quest research. It valued Royal Mail at 599p. “We fundamentally disagreed with the City herd,” he said. “The offer price was too low, driven by institutional investors [who had got priority access to the share sale] holding the line to get the best price. It was not in the best interests of the seller, the taxpayer.” On the first day of dealing, the shares shot up by 38 per cent and within three months the stags had driven the price to a high of 615p.

When Margaret Hodge, chairwoman of the Commons’ public accounts committee, launched an inquiry the following spring, she was clear that the share price told all, that “the department [for business] had no clue what it was doing”. It took the shares five years to fall back below the float price. During that time, the Treasury sold off its residual holdings, having retained a 30 per cent stake, first at 500p and then again at 455p.

The share price slide of 2018 coincided with the retirement of Moya Greene, who had been chief executive since 2010. During her tenure Royal Mail Group hit annual profits close to or above £500 million and was within touching distance of hitting its 93 per cent target of next-day delivery of first-class post. The Greene era also coincided with industrial peace. No strikes were called on her watch.

Critics would argue that accord with the CWU was achieved by a failure to drive through the workplace reforms that were needed to modernise the company’s British operations. The can, it is said, was kicked down the road.

Needing a new chief executive, the company appointed Rico Back, a German who had run the group’s GLS international business since Royal Mail had acquired it in 1999. A new chairman emerged, too, Keith Williams, best known for being at the centre of years of industrial strife at British Airways. Within weeks, the company and the union were at war.

Back abruptly quit less than two years into the job. Williams took control of the company before appointing Simon Thompson, whose chequered career had included running the government’s ill-starred test-and-trace Covid-19 response, with a brief to drive through workplace reform. Months of strikes followed as the CWU countered a campaign that it saw as an attack on employees who had been in the pandemic frontline and had helped to deliver the company record profits during the online shopping boom of Covid lockdowns. Thompson was later ousted, the manner of his leadership excoriated by the Commons’ business select committee. The union signed a peace deal not long after.

The Royal Mail of 2024 is heavily lossmaking, with less than 75 per cent of first-class post delivered the next day. Until eight weeks ago, the shares were in a slough of despond. Then came the offer from Kretinsky, a tycoon whose Czech Sphinx nickname has become rather more widely known in recent weeks. Williams took very little time in accepting the bid.

At privatisation, the government, some believe carelessly, declined to retain a “golden share”, the right to veto any such takeover. However, that power has been reclaimed under the post-Brexit National Security and Investment Act, leaving the final recommendation to the Secretary of State in the Cabinet Office.

The Simpson synopsis is this: taxpayers lost out, but now so have shareholders in a company whose stock price has underperformed the market by more than 50 per cent. In his view, the offer by Kretinsky’s EP Group “is not particularly attractive and undervalues the company, but it does come with a risk premium of the costs of a universal service and an inflexible union. The offer could be seen as putting shareholders out of their misery. But it feels more like wealth transfer, from taxpayers to shareholders and now to EP Group.”

Daniel Kretinsky makes the case for Royal Mail bid

Bankers advising a Czech tycoon on his £3.6 billion takeover bid for the parent company of Royal Mail are seeking to shore up support for the deal amid opposition from some large shareholders.

Advisers to EP Group, the conglomerate controlled by Daniel Kretinsky, have been arranging meetings with large institutional investors in International Distribution Services, the owner of Royal Mail, after last month’s 370p-a-share offer.

EP Group’s takeover has been recommended by International Distribution Services’ board, but some leading investors are concerned that the price undervalues the 508-year-old former state-owned postal services group.

One top ten investor who had been due to meet BNP Paribas, one of EP Group’s advisers, last week is understood to remain undecided on whether to accept the bid. Another large shareholder that is opposed to the price being offered also was invited to a meeting.

Columbia Threadneedle became the first large shareholder to speak out against the offer, saying on the day it was announced that it did not “fully reflect [the business’s] long-term intrinsic value”.

EP Group’s offer is pitched at a 72.7 per cent premium to the International Distribution Services share price before its interest emerged. The shares reached almost 600p three years ago, having been floated at 330p in 2013.

Attempts by Kretinsky’s bankers to sell the deal to shareholders come as the billionaire is due to meet Kemi Badenoch, the business secretary, this week as he also seeks to garner political support. Last month Badenoch met Martin Seidenberg, the chief executive of International Distribution Services, where she welcomed the contractual undertakings being agreed between the two sides as part of the deal but said that ultimately it would be for the government to consider and agree.

Keith Williams, the chairman of International Distribution Services’ board, which is being advised by Barclays, Bank of America Securities and Goldman Sachs, has said the offer is “fair and reasonable, given that there are uncertainties ahead” and that it “allows investors to realise value at a significant premium”. The board also had “negotiated a far-reaching package of legally binding undertakings and commitments”, he said.

The board holds shares worth about £1 million combined, based on the offer price and the shares detailed in the company’s last annual report. Seidenberg and Mick Jeavons, the former finance director, were granted a further 288,888 and 239,361 shares, respectively, under a three-year 2022 incentive scheme, which are subject to performance conditions.

Employees retain a 5.5 per cent stake in International Distribution Services, stemming from the award of 913 shares to most staff at the time of privatisation.

[Whinealot]

I am glad this article points out that all 3 of the main political parties had their grubby hands all over this. There are still loads of people who conveniently forget that it was all started by Labour, and executed by the despicable tories with a helping hand by the ever treacherous Vince Cable (a DHl exec at the time I believe) the whole episode stinks and has done all the way.