By 
Proactive Investors – After Royal Mail (LON:IDSI) owner International Distributions Services PLC received a revised takeover proposal from ‘Czech Sphinx’ Daniel Kretinsky’s EP Group yesterday, there were conflicting views from analysts about whether the deal will go through.
This came as government ministers were reported not to be intending to block the takeover, where the put-up or shut up (PUSU) deadline for a firm offer to be made is 29 May.
As the IDS board has indicated it is minded to recommend an offer at this level, “it appears the remaining obstacles to a board recommendation are the undertakings and contractual commitments required to try to secure government approval”, said analyst Gerald Khoo at Liberum Capital.
“We remain highly sceptical on the prospects of government clearance, especially if it falls to a potential future Labour government to decide,” says Khoo, pointing to existing ‘public interest’ rules on takeovers.
The National Security & Investment Act gives the government the power to intervene in takeovers and similar situations related to entities where there is a significant public interest, such as critical national infrastructure.
Given that Kretinsky’s VESA Group vehicle previously requested clearance under the act to raise its shareholding above 25%, Khoo said he sees “little room to doubt that IDS (or at least Royal Mail) falls within the scope of the legislation”.
Doubts were also cast by Chris Beauchamp, chief market analyst at IG.
“I don’t know whether the bid has much chance in an election year really,” he said. “To be commercially viable Royal Mail needs to trim its service obligations, but the government might not be keen on that right now.
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“It will certainly make life more difficult, but ultimately IDS is not really attractive so long as current service levels have to be maintained.”
Danni Hewson, head of financial analysis at AJ Bell, said while the sweetened deal from Kretinsky has been labelled ‘fair’ by IDS chairman Keith Williams, even though it is substantially down on share price highs of yesteryear, the company has “been running to stand still”.
She said Ofcom may also have objections.
“The regulator will undoubtedly take a good long look at these takeover plans and may yet decide to prevent this deal going through.”
But could the bid and IDS’s initial response not quite be what they seem?
“It could be that IDS’s indication that it is minded to back the deal is just another move on the chess board designed to push the watchdog and the government to soften its stance on the universal service obligation,” said Hewson.
“Private companies have shareholders and an obligation to make money for investors, and with fewer and fewer people sending letters, this part of the business has become tricky.
“Whilst there is a clear public interest case to keep current service levels it’s hard to make those demands from a company that is no longer in the public realm.”
Susannah Streeter, head of money and markets Hargreaves Lansdown (LON:HRGV), noted that the bid comes soon after Emma Gilthorpe has taken up her new job at the boss of Royal Mail and the company detailed proposals to scale back second-class letter deliveries in an attempt to cut costs and limit losses.
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Any reforms still appear to be in the distance, but she said EP is “clearly encouraged by the noises coming from the regulator and is eyeing up considerable possibilities the international postal arm presents”.
The group’s international arm GLS has long been considered the jewel in the company’s crown, enjoying a level of success which Royal Mail has found so elusive, so it could be the real target here for Kretinsky.
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