Sell Royal Mail. That’s the advice of broker Liberum in the wake of the Deutsche Post’s (ETR:DPW) agreed £243mln takeover of UK Mail (LON:UKM).
Liberum said the takeover will pit the German postal giant head-to-head with the Royal Mail (LON:RMG) for a share of British parcel deliveries.
Read - Deutsche Post agrees takeover of UK Mail
Powerful competition
“UK Mail competes with Royal Mail in bulk letters and parcels,” said the broker in a note to clients.
“We would expect it to become a much more powerful competitor with the backing of a much larger, financially stronger and ambitious owner.”
The market was certainly taking quite a bearish stance on Royal Mail with the stock down 6.7% this week to 486p.
However, Liberum thinks the shares are worth as little as 320p each.
By contrast, UK Mail investors must be tickled pink by the Deutsche Post bid, which was pitched at 440p a share, a 43% premium to Wednesday's closing price. Oddly UKM shares have nudged 1.89p above that level, perhaps showing there may be a rival offer out there.
Cost-cutting and consolidation has been taking place across the industry, with the last big deal being FedEx’s £3.8bn takeover of TNT of the Netherlands.
Quit in despair
As AJ Bell’s Russ Mould explains, it marks Deutsche Post’s re-entry into a market it had “quit in despair at ever turning a decent profit”.
Stockbroker Davy notes that in the wake of its 2013 initial public offering, the company revealed a 1% change in revenue in the Royal Mail’s UK operations could affect group operating profit by 17%.
“On this basis even a slight increase in competition would have a material impact,” said Mould.
However, Cantor Fitzgerald’s Robin Byde reckons the competitive impact would remain modest for at least the next 12-18 months.
The Germans are coming
At the moment, the UK parcel delivery is dominated by the 500-year-old Royal Mail.
The once state-owned institution already competes with Deutsche Post in the rest of Europe through its General Logistics Systems arm, but the takeover brings the competition right to its doorstep.
King in its home market, Deutsche Post is now looking to expand across Europe as it taps into the growing demand for non-express delivery from online shoppers.
The takeover of UK Mail will add 50 UK distribution centres and a fleet of 2,400 delivery vans to its British operations.
In January, Deutsche Post bought a stake in French courier Relais Colis SAS and has already scooped up a number of postal operations across 16 regions in Europe.
The Royal Mail declined to comment.