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IDS – improved takeover offer received from EP Group

The board at IDS is considering an improved takeover offer from EP Group, valuing the company at around £3.5bn.
International Distributions Services  - ongoing strike woes cloud

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International Distributions Services (IDS) has received an improved offer from EP Group to buy the company. A previous proposal had already been rejected.

The new terms represent a total value of 370p per IDS share. Comprising of 360p in cash, and 10p made up of an ordinary dividend (2p) and a special dividend (8p). This reflects a 15.6% increase on the original proposal and values IDS at around £3.5bn.

This is not a firm offer, but the IDS board has said it would consider recommending these terms to shareholders subject to certain conditions being met. IDS has agreed to extend the original offer deadline until the 29 May.

The shares were up 17.3% on the day.

Our view

IDS has rallied once again after news broke that major shareholder, EP Group, has made an improved offer to buy the business outright. This time, the £3.5bn implied valuation is enough to whet the board’s appetite. This isn’t a firm offer, but subject to certain conditions being met it looks like it’d be high enough for the board to put it to a shareholder vote.

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.

A possible return to dividends has also been floated in front of shareholders, but given the ongoing issues it's unlikely to be material for now, and there can be no guarantees.

The agreement with the unions, while welcome, is certainly proving to be no magic wand. The expected return to profitability is still some way out, though we’re encouraged to see a permanent CEO has now been appointed. Ultimately, we still see a lot of uncertainty ahead as IDS grapples with new leadership and operational adjustments at Royal Mail. In the very short term, the valuation will be volatile and led by takeover news.

IDS key facts

All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 15th May 2024