Beware the Czech Sphinx: Royal Mail predator’s debt-fuelled deal will probably be dangerous for all stakeholders, says ALEX BRUMMER

Jonathan Reynolds ought to be careful what he wishes for. His House of Commons description of Royal Mail predator Daniel Kretinsky as a legitimate business person is hostage to fortune.

We have discovered since this Labour government took office how tribal it is.

What the unions want, they get. Gains include enhanced workers’ rights and inflation-busting pay deals for the public sector and railwaymen.

The Business Secretary’s willingness to countenance the undercooked £3.6billion bid from the ‘Czech Sphinx’ for International Distributions Services (IDS), owner of the Royal Mail, is the result of two forces.

The Communications Workers Union, the bane of successive chief executives of the Royal Mail, broadly favours the Kretinsky deal. 

It has extracted pledges about security of employment, pay and other workers’ rights for at least five years, a deal beyond the its wildest dreams.

Debt-fuelled: Daniel Kretinsky (pictured), nicknamed the Czech Sphinx, has bid £3.6bn for Royal Mail-owner International Distributions Services

This, and pledges on the delivery services, would be built into a robust deed of agreement. 

A tempestuous union is promising quietude and Labour is anxious to avoid the industrial disruption which plagued the Tories. The deal can be justified, in the same terms as the sellout of chip pioneer Arm Holdings to Softbank, as showing Britain is open to business.

We know how well that worked out.

All the advance indications are that the Kretinsky bid will be cleared under the National Security & Investment Act.

Yet there is much still much unknown about Kretinksy’s Russian bloc entanglements and those of his partners in the Slovak-founded private equity group J&T.

There is something else Reynolds needs to understand: public-to-private buyouts don’t happen in a vacuum. They require the acquiring company to take on debt.

In the case of the Kretinsky bid for Royal Mail, loans of some £3billion have been arranged. The IDS already has £2billion of debt. Servicing this, in even the best of circumstances, would stymie investment and innovation.

Both are much needed at the Royal Mail. The UK has learned from the experience of grocer Asda how high-interest payments allow little room for improvement.

Indeed, they can put companies and services on the road to ruin.

Reynolds should think again before trapping the UK in a deal which in the end will be bad for all stakeholders.

Direct action

If Aviva boss Amanda Blanc thought that Direct Line would jump at Aviva’s 250p-a-share, £3.3billion offer, she will be disappointed. 

Direct Line chief executive Adam Winslow is not that interested in working with Aviva again, having left to take charge earlier this year.

Winslow moved rapidly to make changes. He has slashed Direct Line’s workforce, moved to digitalise operations and is seeking to focus on motor, home, commercial business and car breakdown cover.

Defending it against as established a UK player as Aviva will prove more difficult than resisting the offer from lesser known Belgian insurer Ageas earlier this year.

That was repelled but it is worth noting that the rise in the share price of Ageas since it was turned away means that its bid is now worth more than Aviva’s. 

The 57.5 per cent premium of the Aviva bid to Direct Line’s pre-bid share price may look generous. 

The recent success that Debbie Crosbie at Nationwide has had in extracting value from Virgin Money illustrates why no board should surrender at the first smell of cordite.

The discount of London to New York and other markets wipes out a large part of the premium and there is clearly great disguised value in the policies under the bonnet at Direct Line.

Shareholders and the board must hold their nerve. There could be a bigger Christmas bonus ahead.

Wakey-wakey

As IF the London Stock Exchange doesn’t have enough to worry about, here comes a new challenge. 

New York regulators have approved a licence for the 24 Exchange, financed by Steve Cohen’s Point72 Ventures fund, to trade round-the-clock.

The venture seeks to cash in on the desire of a new generation of younger tech-enabled investors who turn on PCs after a night of carousing and want to deal.

At present they can only trade through ‘dark pools’, where clients trade among themselves but prices are not disseminated. Time for a City catch-up.