With Royal Mail owner International Distributions Services PLC (LSE:IDS) agreeing to a formal offer from the Czech Sphinx Daniel Křetínský’s EP Group, Britain’s iconic mail service, user of the royal cypher of HRH King Charles III, is one step closer to coming under foreign ownership.
But even though the financial terms of the deal appear to be signed, sealed and delivered, there remain significant political roadblocks to overcome.
Both major parties have raised concerns over the takeover, but with Labour the overwhelming favourite to win the upcoming election, Křetínský is veering towards a political showdown with a Keir Starmer-fronted, labour union-aligned government.
Is the Czech Sphinx's IDS takeover a done deal, or will the political roadblocks prove insurmountable?
What remains in doubt?
Labour’s Shadow Secretary of State for Business & Trade Jonathan Reynolds has drawn some clear lines in the sand for any Royal Mail takeover.
Writing to Křetínský earlier this month, Reynolds asserted that Labour “would never accept” a takeover unless some “cast-iron guarantees” are met.
First and foremost, Reynolds demanded assurances that IDS would remain headquartered in the UK and a UK tax resident.
In today’s formal takeover bid, Křetínský played ball, at least in the near term.
For the “relevant period”, EP Group will “ensure that IDS and Royal Mail maintain their headquarters in the UK”, and for the “relevant period”, will “ensure that IDS and Royal Mail… remains tax resident in the UK”.
What is this relevant period? That would be “the five-year period commencing on and from completion of the acquisition”.
Five years is an objectively short time for a British institution with its roots in the 17th century, a fact not overlooked by analysts.
“We still see government clearance under the National Security & Investment Act as a major hurdle. While the undertakings are significant, they only apply for a five-year period at most,” said Liberum, adding: “We remain to be convinced that this will be sufficient to secure support from whichever government gets to make the decision.”
The Universal Service Obligation
Royal Mail’s government-mandated Universal Service Obligation (USO) is also shaping up to be a major source of contention.
In his letter to Křetínský, Reynolds wrote: “We believe the USO underpins our postal service and the enormous value it has for communities and businesses as well as being an important foundation of the union. In that spirit, can you confirm EP Group’s commitment to the USO and that it would be your intention for Royal to remain the Universal Service Provider?”
Again, Křetínský said he will play ball, again, for the relevant five-year period.
But with regulator Ofcom’s calls to “modernise” the USO, there is a question mark over what this obligation will look like in the years to come.
Ofcom’s rationale for modernising the USO, which could see the number of letter-delivery days reduced from six to just three, is understandable- letter volumes have nearly halved since 2011, yet the USO has remained static.
Image credit: Ofcom
Per the takeover offer, Křetínský will not push for “any alternative proposal for the reform of the USO until Ofcom has finally determined the outcome of its consultation in relation to the USO”.
Labour will likely demand clarity from such opaque language, even though current owner IDS has also called for a modernisation of the USO.
In accepting Křetínský’s offer, IDS said the “lack of action by the UK Government and Ofcom on USO reform” has “negatively impacted” Royal Mail’s financial performance.
According to IDS: “Royal Mail has lost market share in recent years as new competitors have entered the market without the financial burden and high fixed costs associated with maintaining a network to deliver the current USO.
“This has contributed to material financial losses in recent years and limited Royal Mail's ability to invest and transform in step with the changing competitive environment.”
The union question
“The Labour Party believes that Royal Mail staff are essential workers that offer great social value to our communities,” wrote Reynolds.
He asked: “Postal workers are Royal Mail’s greatest asset, can you confirm, should this deal go through, that you will work closely with the Communication Workers Union (CWU) to build a sustainable Royal Mail?”
On this most political of issues, EP Group said it “sees cooperation with both trade unions, the CWU and CMA Unite, as crucial for the future of Royal Mail and following completion of the acquisition intends to engage in further discussions with both partners regarding the future operation of the Royal Mail business”.
One thing is for sure, there will be no love lost between the CWU and IDS.
In response to today’s takeover offer, CWU General Secretary Dave Ward said: “This situation is a direct result of a failed and ideological privatisation over a decade ago mixed with the blatant mismanagement of the company in recent years.
“These events have ripened one of the most iconic and important companies in the UK for a takeover by foreign investors.
“We do welcome some of the commitments that have been made but the reality is postal workers across the UK have lost all faith in the senior management of Royal Mail and the service has been deliberately run down.”
In a pragmatic if slightly frosty statement, Ward said the CWU will meet Royal Mail’s potential new owner next week “and call for a complete re-set in employee and industrial relations, the restoration of postal services and further commitments on the future of the company”.
Five more years
In drafting a formal takeover bid for Royal Mail, Křetínský carefully approached the political questions hovering over EP Group’s potential takeover of Royal Mail.
However, a lot hinges on whether the five-year moratorium on tax, domiciliation and USO changes is enough to sate the political and regulatory debates encircling the bid.
For Reynolds’ part, he said today’s “assurances are welcome that Royal Mail will retain its British identity and safeguard its workforce with no compulsory redundancies”.
"Labour in government will ensure these are adhered to," he added.
That is, of course, assuming Labour wrests control of parliament in July. While the odds are in Starmer’s favour, it is not a foregone conclusion.
Yet the Tories have also voiced similar concerns, suggesting the roadblocks will not magically disappear following an election upset.
Shareholders will vote on the deal at IDS's next annual general meeting in September.
Proactive has reached out to Labour and EP Group for further comments.