We should feel queasy about Royal Mail being sold to private equity

Unless you are a keen reader of the business pages, you may not have noticed that the Royal Mail is about to be sold. Not by the government, of course, since that happened a decade ago, but in a takeover by a businessman who needs to borrow several billions to finance the deal. Curiously, hardly anyone outside the mainstream of finance seems to care about this venerable public service going under the hammer.

To say that the lack of criticism results from the grotesque rewards being dished out to almost anyone involved in the process would be uncharitable (so many of the City’s finest are compromised and thus unable to comment) but even today £146m is quite a payday for the hordes of bankers, brokers and advisers. So: the buyer is a private company controlled by Daniel Kretinsky, usually described as a Czech billionaire, although we don’t really know about his wealth. 

His consortium is offering 370p a share for International Distribution Services, as the top company in the group is now called. The shares were around 250p before his interest became commonly known, so a fat premium, then, over what the City calls the “undisturbed” price, as if the shares had been gently sleeping before the postman came calling.

The offer is still below the privatisation price all those years ago. The Royal Mail has been at war with the posties off and on ever since, and has been perennially lossmaking. The soaring price of stamps has not been enough to counter the fall in letter volumes. The profitable part is GLS, a European parcels business. The board had earlier hinted that it could effectively let the mailers go bust and carry on with GLS. 

That board has now agreed the price, having previously played hard to get. The formal documents for the bid are now out, and apart from those eye-watering fees, contain little useful information at great length. As The Guardian’s Nils Pratley pointed out, there is nothing about all those lovely freeholds in valuable locations, despite the board telling us how important they were when it was trying to push Mr Kretinsky to raise his price. 

There are other reasons to feel uneasy about this £3.6bn deal. It is a takeover by private equity, a class of investor known best for using borrowed money, stripping out costs, extracting returns and departing. Royal Mail has expensive obligations, although the six-day-a-week postal delivery often appears more honoured in the breach, and we would hardly notice if it went.

Mr Kretinsky is promising to keep to the rules for the next five years, while running the business more efficiently, but it is hard to see how they might realistically be enforced if he decides they are costing too much. Given the amount of debt, both existing on the IDS balance sheet and the money he must borrow to buy the business, the pressure to sweat the assets (and the posties) will be relentless.

This whole deal looks like a high-risk enterprise, and it would be politically naive to believe that the cost of running such a fundamental service could never fall back into the arms of the taxpayer, Thames Water-style. Even if Mr Kretinsky can put the Royal Mail on a genuinely sound footing with a happy workforce, it does seem curious that nobody seems to care about a 164-year-old British institution that is still a key component of our social and business fabric being knocked down in a leveraged buy-out. Unless Mr Kretinsky really can square the circle, it may be that one day not far away, don’t care is made to care.

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