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IDS – rejects takeover proposal from minority shareholder

Royal Mail parent, IDS, has rejected an all-cash proposal from its largest minority shareholder.
International Distributions Services  - ongoing strike woes cloud

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International Distribution Services (IDS) has rejected an all-cash initial proposal to buy the business from EP Group, the parent company of its largest minority shareholder.

No official offer has been made, and EP Group has until 5 PM on 15 May to make one.

On 2 April, IDS announced Emma Gilthorpe as the new Chief Executive Officer of Royal Mail Group.

The shares rose 18.5% in early trading.

Our view

IDS has rallied after news broke that an all-cash offer might be on the table from one of the group’s minority shareholders. An initial proposal has been rejected, and details are very thin on the ground, but markets are anticipating negotiations.

The potential suitor clearly sees potential in the underperforming Royal Mail business, where there have been early signs of improvement. Trading at Royal Mail over the important Christmas period was good enough to keep the recovery ticking along. It was vitally important for IDS, Royal Mail's parent company, that things moved in the right direction, given a push to bring on temporary workers over the period. But, it's worth keeping in mind growth was flattered by strike actions in the same period last year. It's far too early to call the recovery a success.

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.

International Distribution Services 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: 17th April 2024