Royal Mail (IDS) share price is surging but beware of this risk

The International Distributions Services (LON: RMG) share price went parabolic on Wednesday as it reached its highest level since May 18th 2022. It roared by over 18%, making it the best-performing company in Wall Street.

The main reason for the rally is that Daniel Kretinsky, a Czech billionaire, raised his offer for the company to $3.5 billion. He had previously offered to buy the parent company of Royal Mail and Global Logistics Service (GLS) in a £3.1 billion deal. The board rejected the initial offer saying that it undervalued the company.

Kretinsky’s deal values the stock at 370p, higher than the intraday high of 320p. Therefore, the price action is a sign that there are concerns about whether the deal will go on in the first place.

The biggest risk for the deal is that it is unclear whether the UK government will allow it to go on because of its importance to the economy. For starters, Royal Mail has been in business since 1635 and was owned by the government until 2022 when it went public.

IDS share price chart

Royal Mail is also a highly regulated company as part of its privatisation deal. To a large extent, the company cannot make decisions like price rises or delivery days without the approval of the communications regulator. 

In fact, the UK conducted a national security investigation into his partial ownership in 2022. As such, there is a likelihood that it will do another investigation if Royal Mail’s board approves the purchase.

There is also another risk in that there are very many jobs at stake. Royal Mail employs over 150k employees in the UK. The workers union could reject the takeover and pressure the government to do the same. 

Daniel Kretinsky has pledged not to cut jobs or increase the company’s debt. Still, most people in the UK know the risks of such takeovers. For example, Macquarie, a private equity firm, took control of Thames Water, and increased its debt dramatically. Macquarie then sold the company, which is now collapsing. 

Therefore, there is a real risk that the UK government will not allow the takeover, which will lead to a sharp reversal of the stock.

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