Response to offer for IDS

We note the statement from the Board of IDS confirming that, on 9 April 2024, it received a preliminary and conditional non-binding proposal from EP Group regarding a possible cash offer for the entire issued and to be issued share capital of International Distribution Services plc (IDS) not already owned by EP Corporate Group a.s. (EP Group) and its affiliates, namely VESA Equity Investment S.à r.l (VESA Equity) at 320 pence per share.

Redwheel is third largest shareholder in IDS (behind Vesa and Schroders) and owns 63,754,494 shares (6.65% of company) on behalf of its investors as at 19 April 2024. We wish to make the following points in response to the offer from EP Group.

We are in full agreement with the Board, together with its advisers, that the possible offer of 320 pence per share significantly undervalues IDS and its future prospects. Accordingly, we support the Board’s decision to unanimously reject the proposal on 11 April 2024.

We call upon Ofcom to reflect on both the timing and the level of this offer which we regard as opportunistic. The share price of IDS has fallen by 62% from 573 pence on 14 June 2021 to 214 pence immediately prior to the announcement of the potential offer and is still substantially below the IPO price of 330 pence set ten years ago. We believe this reflects the current financial situation of Royal Mail which posted losses of £419 million in financial year 2022/23 and losses of £319 million in the first six months of the 2023/24 financial year. This has meant shareholders have seen very weak returns, and no dividend since September 2022.

We also note that parent company IDS plc’s credit rating of BBB is on negative watch. Royal Mail’s financial position has affected the Group’s credit rating and puts at risk Royal Mail’s financial stability and IDS’ ability to attract funding from the capital markets, the main rationale for the IPO in 2013. We believe that, unless steps are taken to improve the profitability of the Royal Mail, it may not be a sustainable business in the long-term and could remain vulnerable to corporate predators which we believe is not in the interests of shareholders, customers, or employees.

In order to make Royal Mail a sustainable business for the benefit of all stakeholders, we believe steps must be taken to return the business to profitability, and we also believe the Universal Service Obligation (USO) – the legal requirement for Royal Mail to deliver to the United Kingdom’s 32 million addresses six days a week – now needs urgent reform. Letter volumes have declined from 20 billion at their peak in 2004/5 to seven billion in the last financial year and are likely to continue to fall. The USO means Royal Mail must maintain a high fixed cost network without the revenue to sustain it. Ofcom recognised this when it calculated that providing the current USO to the UK has a net cost to Royal Mail of £325m to £675m every year (source: Ofcom). We agree with Ofcom that “providing the USO imposes a significant net cost on Royal Mail and that it is “likely to be unfair” that Royal Mail’s shareholders bear this cost. The scale of the net cost, coupled with the underlying financial performance of Royal Mail, demonstrates the urgency for USO reform. Whilst we do not have a firm view on which of the options for change outlined by Ofcom is more appropriate – we leave that to Royal Mail to propose – we would urge that change to the USO needs to be meaningful, provide long-term relief from the material and unreasonable cost burden, and be implemented rapidly.

Finally, we do not believe it is in the interests of the shareholders, employees, or customers of Royal Mail for it to be broken up or sold off. Our preferred option would be for the company to remain together, and we believe if Ofcom is willing to reform the USO, it has a sustainable future in which all stakeholders may benefit. We welcome the changes agreed with the Communication Workers Union in July 2023, and note that they are already starting to show genuine results in terms of improved quality of service for customers e.g. sick absence has reduced by c.25% by end of December 2023 compared to prior year (source: IDS). In addition, workers are benefitting from increased recruitment of permanent employees on new, more flexible contracts, and reduced reliance on agency staff.

In conclusion, we believe that progress is already being made to transform Royal Mail into a profitable and sustainable business, but we would urge Ofcom to reform the USO in order to make Royal Mail profitable once more and ensure its long-term sustainability as an independent business which has the potential to benefit all stakeholders.

Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. Forecasts and estimates are based upon subjective assumptions about circumstances and events that may not yet have taken place and may never do so.

No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment. Nothing in this document should be construed as advice and is therefore not a recommendation to buy or sell shares. Information contained in this document should not be viewed as indicative of future results. The value of investments can go down as well as up.

The statements and opinions expressed in this article are those of the author as of the date of publication, and do not necessarily represent the view of RWC Partners Limited or of its group companies (together Redwheel). This article is issued by RWC Asset Management LLP, in its capacity as the appointed portfolio manager to the Temple Bar Investment Trust Plc. Redwheel, is authorised and regulated by the UK Financial Conduct Authority and the US Securities and Exchange Commission.

Redwheel may act as investment manager or adviser, or otherwise provide services, to more than one product pursuing a similar investment strategy or focus to the product detailed in this document. Redwheel seeks to minimise any conflicts of interest, and endeavours to act at all times in accordance with its legal and regulatory obligations as well as its own policies and codes of conduct.

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