International Distributions Services Plc (IDS) Ordinary GBP0.01

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.

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