International Distribution Services Plc (IDS) Ordinary GBP0.01

IDS has reached an agreement with a group of investors, led by its largest shareholder, to buy the business and take it private. The offer value is unchanged from a couple of weeks ago, but several conditions have been agreed to maintain services and the Royal Mail brand, among other things.

The offer values IDS’ equity at £3.6bn (£5.3bn including debt). Shareholders would receive 360p in cash per share and the board has also proposed a 10p dividend (8p conditional on the deal being approved).

The deal is now subject to shareholder and regulatory approval.

The shares rose 3.2% in early trading.

Our view

IDS, the owner of Royal Mail, is set to go private. After a series of negotiations, the board plans to put a £3.6bn offer to shareholder vote. The price was all but agreed a couple of weeks ago, but the board was keen to have several assurances in place to preserve many of Royal Mail’s commitments to the UK consumer.

The potential suitor clearly sees something in the underperforming Royal Mail business, where there have been early signs of improvement. But there's a lot to do, and the underlying business is under some pressure.

Parcel volumes are down from the booming demand seen over the pandemic, and letters have long been in a structural decline. As the UK's universal postal service, Royal Mail is obligated to deliver letters six days a week. But maintaining an infrastructure built for 20bn letters when you're now only delivering 7bn isn't a recipe for an efficient operation. IDS wants to be allowed to right-size infrastructure to reflect the modern-day reality, and conversations are underway with the regulator. But any reforms are likely to be a long time coming.

For now, winning back customers lost during strike actions over the past year or so is a major focus. Returning Royal Mail to profitability will rely on top-line growth. Until that happens, hopes of breakeven profit for IDS at the group level is entirely propped up by the international business, GLS.

We're encouraged that GLS is still growing revenue, and we believe this division has some long-term growth opportunities, but growing margins is proving to be a challenge. That may become easier if inflation subsides further. Potential bolt-on acquisitions to GLS are also on the table.

As part of the deal, the board has proposed a 10p dividend. The bulk is subject to the deal being approved but there was a small 2p final dividend announced, irrelevant of whether the deal goes ahead. As ever, nothing is guaranteed.

IDS looks to be on better footing than it has been for some time, with Royal Mail on a pathway back to profitability and GLS performing well. But there’s no denying the challenges it faces in the UK, and in the near term the valuation will be driven by how the takeover progresses. Regulatory approval could be a tough hurdle, given how important Royal Mail is to the UK economy.

Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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