Takeover activity lifts Royal Mail share

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ROYAL Mail [LON:RMG] shares moved 1.3pc higher yesterday after takeover activity in the sector underpinned the value in the company’s European parcel delivery operations.

The 500-year-old postal group may be a UK-focused company but it also has a European parcel delivery operation called General Logistic Systems (GLS). The GLS business was started in 1999 and now delivers about 404m parcels every year. It contributed about 16pc of the Royal Mail group’s total revenues and a quarter of the profits last year.

And the European market is growing. Royal Mail said in February that in the nine months to the end of December, GLS provided the best performance across the group, delivering 8pc more items and increasing its revenues. However, Royal Mail warned that the introduction of minimum wages in Germany could have a “significant” impact on the cost base.

Another factor holding GLS back is the weakness of the euro against the pound. Analysts from broker Berenberg estimate that parcel volumes and revenue in euros will increase at more than 5pc during the next two years. But with the value of the euro plunging in foreign exchange markets, those revenues, when translated into pounds, will be largely flat. Pre-tax profits from GLS are also expected to be flat for the next three years at about £100m.

The disclosure yesterday of the anticipated takeover of TNT Express by US rival FedEx proves the underlying value in Royal Mail’s GLS business. FedEx has agreed to pay €4.4bn (£3.2bn), a 33pc premium to the previous day’s closing price of TNT Express shares and representing about 20 times the forecast earnings at TNT Express.

The comparison between TNT Express and GLS is not perfect. TNT Express is a Europe-focused express parcel delivery service. It operates a fleet of aircraft and vehicles to ensure that packages and parcels reach European cities within a stated time slot and in under 24 hours. GLS is more of a bulk parcel service, with a smaller express operation.

There are no signs that any bids are imminent for Royal Mail’s GLS business, and even if there were, it would be unlikely to be sold. But the FedEx deal does demonstrate that the European postal market is seen as attractive.

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Gert Zonneveld, a broker at Panmure Gordon, thinks that two of the most important factors for the valuation of Royal Mail remain the stance of the postal sector regulator Ofcom and the value of the London property portfolio.


Royal Mail has complained about competition from rival services such as Whistl and Amazon that threaten its ability to deliver post across the country, six days a week, for the same price under the Universal Service Obligation. The threat to investors is that Royal Mail could see its profitable bits of the business disappear and then be left with expensive rural deliveries.

The best case scenario for Royal Mail would be for Ofcom to either offer a subsidy for the rural deliveries, or force new entrants to deliver to wider areas and not just city centres. Ofcom has so far adopted a wait-and-see approach to the new competition. A committee of MPs came to largely the same conclusion last month. Any change in this approach will have an impact on the shares.

The other factor that could boost Royal Mail’s shares is any development on the property holdings. The company sold a one-acre site in Paddington for £110m last year, and there are a further 22 acres in the property portfolio. These include eight acres of prime London property at Mount Pleasant near King’s Cross and 14 acres at Nine Elms, opposite the new Battersea power station development. Analysts from Berenberg estimate the property portfolio could be worth up to £1bn, or about £1 per share.

We like the strength of the business, the balance sheet and the 4.7pc prospective dividend yield on the share and, in an uncertain world, how many companies can say that. In advance of the full-year results on May 21, we say hold.