Daniel Kretinsky, however, was not one of those people. He had his work on his mind as he stretched out on a lounger on holiday. The “Czech Sphinx”, who was on holiday, picked up the phone and dialed Keith Williams. He then made a £3.1billion bid to buy a 500 year-old British institution.
Williams, the chairman of International Distributions Services, Royal Mail’s parent company, was on holiday in Sicily. But Kretinsky, who is a man of principle, would not be pushed away by a vacation. Both men were in constant contact because the Czech owned a 27.5% stake in the company. Williams, as they exchanged pleasantries, quickly realized that this conversation was going to be different: Kretinsky had launched a bid to take over the 508-year-old company and take it off the stock market.
On Wednesday, the news that 320p per share was being considered leaked. Many people were asking: Why?
Alex Paterson is an analyst with City brokerage Peel Hunt. He summarized the feelings about Royal Mail. He said that the Royal Mail has disappointed him for 10 years.
Redwheel is Royal Mail’s largest independent shareholder. It was the first to publicly support the board after Kretinsky made his audacious move.
Redwheel, in a broadside against the Czech billionaire’s “opportunistic” raid on the postal-monopoly, also attacked Ofcom because it left Royal Mail “vulnerable” to corporate predators by blocking regulatory reforms. Ian Lance, cohead of Redwheel’s Value & Income Team and co-portfolio manger at Temple Bar Investment Trust, said: “We don’t believe that it is in shareholders, employees, or customers’ interests for Royal Mail to be split up or sold.”
The company was privatised in October 2013, in the most popular debut on the stock exchange of the time. The thesis was that listing the company would provide it with the capital to modernise their operations. It was after all a strategy that worked for Germany and Austria in 1994 and respectively.
Royal Mail would be completely separated from the Post Office which remains in government hands. The government would regulate private owners to keep them on a tight leash.
But the hopes for greater automation, a better use of technology and an overhaul of work practices, as well as a shift towards parcel delivery, would quickly be dashed. Royal Mail was far from closing the gap with rivals like Amazon. Instead, it would fall further behind. Two key factors played a crucial role. There are many other reasons, but these two were the most important.
Royal Mail has recommitted to the Universal Service Obligation (USO) on privatisation. The Universal Service Obligation (USO) is a set of legally-binding commitments, including the delivery of post to all households in the UK on six days per week.
The economics of the commitment did not make sense. Royal Mail continues to make changes, but the cost base is designed for 20 billion letters per year. Last year’s demand was only seven billion.
Second, the 110,00-strong Communication Workers Union has been very resistant to reforms in working practices and a move towards automation. The CWU began a brutal series of strikes in May 2022 over pay, which pushed Royal Mail to the brink. Last year, both sides agreed on a three-year contract.
Global Logistics Solutions, Royal Mail’s overseas operations, could not have had a more different fate. GLS flourished when it was freed from the restrictions of trade unions and regulatory constraints.
Financially, the results are shocking. Royal Mail suffered a £383-million loss on revenues of £3.5-billion in the six month period ending September 2023. GLS, on the other hand, made a £140-million profit on sales of £2.3-billion.
This dichotomy led some to believe that dividing IDS into two would release value over night. GLS’s value is currently undervalued as it serves as a financial crutch to Royal Mail. GLS could be valued at up to £3 billion if the two companies were separated. This is because GLS would no longer have to fund IDS UK.
A veteran banker said: “There is a long line of people who want to own GLS.” Royal Mail is also in a long queue, but nobody wants to buy it.
Daniel Kretinsky, an international investor, is said to be not interested in breaking up International Distribution Services. Instead he wants to reform Royal Mail without the scrutiny of public markets.
Kretinsky’s plan was assumed to include a carve-up. Sources familiar with Kretinsky’s thinking, however, deny this. The Czech billionaire is adamant about his desire to keep the company intact.
By investing capital in a way that is not subject to the scrutiny of being listed, the UK arm could undergo much-needed changes without undergoing major surgery.
Kretinsky will need the CWU’s support to achieve his goal.
Dave Ward, general secretary of the union, is not hesitant to speak his mind when he reflects on Kretinsky’s approach. He said: “We believe that it’s completely wrong.”
Ward stated that he met with Kretinsky representatives in December last year, and they ruled out any takeover attempts. “I distinctly remember asking: Are you going to bid to take over the company? And the response was no.”
It is difficult to understand what has changed in the last four months. Kretinsky’s own actions are a mystery. After making similar comments in an interview with The Sunday Times, last May about not launching takeovers, questions will surely arise as to whether Kretinsky has kept his word.
One former Royal Mail board director said that “getting unions onside” is only possible if they get a piece of the success. Royal Mail gave employees 20% of the company in 2006 as a reward for supporting a modernisation program and reforms on pension contributions. The result was that the 195,000 employees of Royal Mail received free shares worth £5,000, which entitled them to a dividend each year.
The executive said, “I believe Kretinsky is going to do something similar.” The billionaire’s supporters are hesitant to say if something similar is on the horizon.
They do, however, stress the importance of Kretinsky’s master plan including IDS in its entirety.
Kretinsky, born in Brno in 1975 in Czechoslovakia, was too young to enjoy the benefits of the deregulation that took place in the country after the fall of iron curtain.
Czechoslovakia chose to privatise large parts of the industry before its 1992 split into two nations. It did this by giving citizens vouchers that gave them shares in state-owned firms. Some entrepreneurs took advantage of this and built fortunes. Petr Kellner died in March of 2021 after a mysterious heliskiing accident on Alaskan soil, and Karel Comarek, an energy tycoon in charge of the UK National Lottery, was also among them. Kretinsky is part of the new generation of tycoons.
He assumed that the world will need fossil fuels to produce energy longer than the consensus thought. The contrarian bet has been a huge success. Kretinsky’s energy empire is primarily concentrated in Central and Eastern Europe. However, his businesses in UK and Ireland have also been successful. The Czech earns about £1,000,000 a day running seven coal, oil and gas-fired power plants and one biomass plant.
Kretinsky’s wealth has been diversifying in recent years. Approximately half is invested in food wholesale and retail, and logistics.
At first, his strategy was to acquire large minority stakes in companies, like Sainsbury’s in which he holds 10%. His plan, which he implemented more recently, was to have at least one controlling stake in each of his three main sectors. This manifested in retail with his 62 percent stake in French supermarket Casino. With a large energy portfolio and a number of controlling stakes, it leaves the logistics sector as an anomaly.
Kretinsky, along with his right-hand Roman Silha – a former UniCredit Banker hired by Kretinsky in 2020 to oversee his mergers and purchases – are believed to be unwilling to take a hostile approach. Any takeover would require the approval of the board. Kretinsky would have to convince fellow IDS shareholders that the price was fair if he got it.
This week, Kretinsky will begin to solicit feedback from other shareholders about the merits and benefits of increasing their bid in a series meetings.
Lance will probably give them a cold reception at Redwheel. The top 10 shareholders of Redwheel are also said to be angry.
Lance is also furious at Ofcom. Ofcom’s refusal of change to the USO is a major factor in IDS’s 62% share price drop since June 2021. He said: “We urge Ofcom to reconsider the timing and level of this offer, which we view as opportunistic.”
Ofcom stated: “Reducing letter delivery days for the universal service will require changes to primary legislation by the Government and Parliament.” There are several options for reform. We believe that it is important to have a national discussion so everyone has a chance to voice their opinion before making any proposals.
Politicians such as Sir Vince Cable who, in 2013, was the Business Secretary responsible for Royal Mail privatisation, think it should be stopped, regardless of price. “We placed Royal Mail on the public markets in order to raise capital. This Czech man is in charge of Royal Mail? “I wouldn’t have considered it a good idea and should be seen to.”
Success is not guaranteed. Royal Mail has not yet sent the cheque.