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Royal Mail, a company that relies on delivering messages, has received a clear warning from regulator Ofcom: we hear you. The universal service obligation to deliver six days a week may finally receive the tweaks that Royal Mail has long wanted. This introduces another obstacle to Czech billionaire Daniel Křetínský’s £5.3bn takeover bid.
The communications regulator said on Thursday it would consider changes to the delivery of second-class letters, while leaving first-class unchanged. That means it is considering almost exactly the proposals put forward by Royal Mail earlier this year, the best sign yet that changes are coming. If approved, this could rejuvenate Royal Mail’s owner, International Distribution Services.
The problems with USO are simple: falling letter volume means it costs too much to maintain deliveries at the current rate. IDS shares were trading below their 2013 IPO price before the offering came through.
The company has suggested its proposals would save £300m in costs. The overhaul would mean IDS would be worth substantially more than the 360p a share in cash offered by Křetínský. So would the deal fall through? Not so fast.
Shareholders are faced with a difficult decision. The deal is currently being reviewed for regulatory approval. If approved, investors will have the opportunity to tender their shares in the first quarter of 2025. Ofcom also plans to publish its consultation early next year, with a decision to be made in the summer.
This complicates the position of long-term investors, some of whom have already expressed the view that the offer is too low. The improved likelihood of a USO reform would only reinforce this sentiment.
But thanks to the takeover bid, Křetínský can set its success threshold at just over 50 percent of the register, of which Křetínský has just over half.
Support from long-only funds may be questionable, but arbitrageurs are almost certain to bid in favour, says Mark Kelly of MKP Advisors. They currently make up a tenth of the IDS-revealed register and are more likely to account for 15 per cent. That figure could rise to 30 per cent of the total.
That would be enough for Křetínský to gain effective control. It leaves open the possibility that Křetínský could keep the company listed, which might quell rumours that he could snap up a jewel in the British crown on the cheap. However, he still needs to overcome national security hurdles. The postal reform complicates an already complicated transaction for the Czech Sphinx.