USO reform submission and business progress update

International Distributions Svc PLC

22 April 2024

 

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, IN OR INTO OR FROM ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OR REGULATIONS OF SUCH JURISDICTION

THIS ANNOUNCEMENT DOES NOT CONSTITUTE AN ANNOUNCEMENT OF A FIRM INTENTION TO MAKE AN OFFER UNDER RULE 2.7 OF THE CITY CODE ON TAKEOVERS AND MERGERS (THE "CODE"). THERE CAN BE NO CERTAINTY THAT ANY OFFER WILL BE MADE, NOR AS TO THE TERMS ON WHICH ANY OFFER MIGHT BE MADE

22 April 2024

Update on Universal Service reform submission and further business progress

International Distributions Services plc ("IDS" or the "Company") is today publishing Royal Mail's submission to Ofcom for reform of the Universal Service Obligation ("USO"), as submitted to Ofcom on 2 April, which is now available at www.internationaldistributionsservices.com. As previously announced, the Board of IDS together with its advisers, concluded that the preliminary and conditional non-binding proposal from EP Corporate Group a.s. ("EP Group") regarding a possible cash offer of 320 pence per share for the entire issued and to be issued share capital of IDS not already owned by EP Group and its affiliates (the "Possible Offer") significantly undervalues IDS and its future prospects, including the impact of USO reform.

Royal Mail has developed a clear and detailed proposal for USO reform based on extensive modelling and analysis of customer needs. These changes should be enacted quickly by Ofcom through changes to postal regulations and conditions and do not require legislation.

The Board strongly believes the Possible Offer does not reflect the growth potential and prospects of the Company under a new management team, a significant modernisation programme underway at Royal Mail, and the ongoing review by Ofcom in relation to the future of the USO. The Possible Offer also does not reflect the significant underpin of value through the Group's extensive freehold property portfolio or the Pension scheme in material surplus.

The plans now being executed under the leadership of Martin Seidenberg since he became Chief Executive Officer of IDS in August 2023 are delivering clear operational and financial improvements. The Board is confident that further delivery against these plans will result in IDS becoming a modern logistics company delivering sustainable growth and value for shareholders.

The benefits of management plans for the business are already evident in its performance for FY 2023-24 with good revenue and parcel volume growth across both Royal Mail and GLS, which will be reported on at the Company's full year results scheduled for 23 May 2024.

USO reform

Royal Mail's proposal, based on extensive consultation and detailed modelling, would deliver a more efficient, more reliable and more financially sustainable service, addressing the significant decrease in letter volumes from 20 billion a year in 2004/5 to 7 billion in 2022/3.  It would reduce the net cost of the Universal Service by up to £300 million per year, whilst protecting what matters most to customers. The proposal includes:

·    Retention of the one-price-goes-anywhere service to all parts of the United Kingdom

·    First Class letters continuing to be delivered daily, six days a week (Monday to Saturday) to recognise the importance of next day and Saturday deliveries, especially for the NHS, publishers and greeting cards

·    Retention of the option of First Class and Second Class letters, giving people the choice of price and speed

·    Parcels still delivered up to seven days a week

·    All non-First Class letter deliveries, including Second Class, would be delivered every other weekday

·    The delivery speed of standard bulk business mail (used by large mail shippers for bulk mailings such as bills and statements) would be aligned with Second Class, so they arrive within three weekdays instead of two currently

Royal Mail is also calling on Ofcom to modernise the USO for the digital age by introducing the following new features:

·    The introduction of new, additional reliability targets for First Class and Second Class services, alongside revised, internationally comparable speed targets, to give customers further confidence

·    Tracking added to Universal Service parcels to reflect customer demand

Royal Mail's proposal, if implemented, would reduce the net cost of the Universal Service by up to £300 million per year, through a net reduction in daily delivery routes of 7,000-9,000. Royal Mail is confident it can manage this primarily through natural attrition, and the implementation of these proposals is expected to result in fewer than 1,000 voluntary redundancies. Royal Mail believes that these changes will result in a better, sustainable outcome for our customers, our people, and our shareholders.

Update on further business progress

Under current leadership the Group continues to make good progress and deliver operational and financial improvements. IDS has good momentum, with Royal Mail crossing an inflection point, and GLS continuing to build on its proven track record of delivering top line growth, strong margins and good cash flow generation, enabled by its flexible operating model, broad customer base and geographic diversity.

In FY 2023-24 the Group delivered topline growth across both businesses, with Royal Mail returning to growth in the second half.

Royal Mail

Royal Mail is the largest mail provider in the UK with a strong brand and unparalleled scale and reach to all 32 million UK addresses.  With its transformation well underway, including implementation of the agreement reached with the Communication Workers Union (CWU), the company is well positioned to benefit from accelerating e-commerce driven parcel volume growth as well as delivering on its role as the UK's sole designated Universal Service Provider.

Over the past eight months, Royal Mail's trajectory has seen a fundamental step change, with the operational turnaround momentum now accelerating at pace:

Quality of Service and reliability on positive trajectory:

·    Best Christmas peak performance in four years with over 99% of First and Second Class items posted by the last recommended posting dates delivered in time for Christmas

·    In Q4, more than 93%[1] of all First Class letters delivered within two days

Improved commercial focus:

·    Has driven a successful programme to win back the vast majority of large account customers lost during industrial action, whilst successfully implementing targeted price increases

·    Is enhancing customer convenience with plans to increase number of parcel drop off locations by more than 50% to 21,000:

o  5,000 new Collect+ locations for customers to drop off parcels rolling out in 2024-25

o  Launch of Royal Mail locker network, initially targeting 3,000 locations

o  Launching pilot Royal Mail Parcel Shops, with potential to expand further

Drive for operational excellence through investment and efficiencies, supported by the union change agreement, is:

·    Delivering significant productivity improvements, +4.3% in Q4 year on year, enabled by increased automation and improved ways of working

·    Enabling later start times to ensure more next day delivery, improve reliability, reduce cost and lessen impact on the environment by removing 50% of domestic flights

·    Reducing reliance on agency staff, recruiting more than 9,000 FTE on revised terms and conditions, with greater flexibility e.g. weekend working, supporting quality improvement

·    Allowing the introduction of new attendance and sickness policies, with frontline absence rates declining steadily since introduction in Autumn 2023

·    Enabling the rollout of app-based 'MyPerformance' programme which is already delivering improved first time delivery rates and safety metrics

GLS

GLS is a leading international carrier operating one of the largest ground-based parcel delivery networks in Europe, with global reach and a strong position in the cross-border, deferred parcel segment. It has a proven record of top line growth, strong margins and cash generation and has consistently been one of the most profitable players within the parcel delivery segment.

GLS' asset light business model, broad customer base and geographic diversity enables a resilient performance in a challenging market. It now has presence across 40 countries and a growing footprint in North America, delivering around 900 million parcels per year on behalf of more than 250,000 customers.

GLS is well positioned to drive further growth on the back of the c. €900m of capex invested over the last five years. This investment has supported significant network expansion to increase capacity, including the state-of-the-art hub in Madrid, with Paris and Berlin hubs on course to open this year, and a new automated depot in Copenhagen expected in 2025. GLS is also driving innovation, with new digital services and transforming the last mile - GLS has built one of the largest out-of-home network across Europe, through the fast scaling of lockers, with double digit growth year on year.

Summary

In light of the transformation underway, the progress made and potential for USO reform, the Board is confident that IDS is well positioned to continue to deliver further improved performance across both businesses, supported by a strong balance sheet with ample liquidity.

Keith Williams, Chair of IDS plc, said:

"Following a period of significant change and investment, IDS is crossing an inflection point. Under our current leadership team we have a clear plan to create a modern logistics company, well positioned to deliver sustainable growth, which is starting to deliver results.

"Today we have published the full detail behind our proposal for Universal Service reform. The proposal is based on detailed modelling and customer testing and does not require legislation. The lack of Universal Service reform by Government and Ofcom over the past four years has held back Royal Mail's transformation and urgent action is needed. Reform is in the regulator's hands and we urge Ofcom to accelerate their review.

"This week I will be leading engagement with our institutional investors alongside Group CEO Martin Seidenberg and Group CFO Michael Snape to make clear why the Possible Offer from EP Group significantly undervalues IDS and is highly opportunistic. With momentum behind our plan to transform our business and potential Universal Service reform ahead, we are poised to deliver for all our stakeholders, building on the significant capital investment made by the Group over the last five years."

Enquiries

IDS plc                                                                                                                                 

Investor Relations

John Crosse

Phone: [phone]

[e-mail]

Media Relations

Jenny Hall

Phone: [phone]

Email: [e-mail]

Greg Sage

Phone: [phone]

Email: [e-mail]

Royal Mail press office: [e-mail]

Headland Consultancy

[phone]

Susanna Voyle, Matt Denham, Chloe Francklin

Barclays Bank plc (Financial adviser and corporate broker to IDS)            

[phone]

Alisdair Gayne, Nicola Tennent, Aamir Khan, Philipp Gillmann

BofA Securities (Financial adviser and corporate broker to IDS)                                 

[phone]

Ed Peel, James Robertson, Justin Anstee, Jack Williams

Goldman Sachs International (Financial adviser to IDS)                                                

[phone]

Eduard van Wyk, Mark Sorrell, Owain Evans

Important Notices

This announcement is not intended to, and does not constitute or form part of, any offer to sell or issue or any solicitation of an offer to purchase, subscribe for, or otherwise acquire, any securities or a solicitation of any vote or approval in any jurisdiction, whether pursuant to this announcement or otherwise.

The distribution of this announcement in jurisdictions outside the United Kingdom may be restricted by law and therefore persons into whose possession this announcement comes should inform themselves about, and observe, such restrictions. Any failure to comply with the restrictions may constitute a violation of the securities law of any such jurisdiction.

Merrill Lynch International ("BofA Securities"), which is authorised by the UK Prudential Regulatory Authority and regulated by the UK Financial Conduct Authority and the UK Prudential Regulatory Authority, is acting exclusively for IDS and for no one else in connection with the Possible Offer and will not be responsible to anyone other than IDS for providing the protections afforded to its clients or for providing advice in relation to the matters referred to in this announcement.

Goldman Sachs International, ("Goldman Sachs") which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority in the United Kingdom, is acting exclusively for IDS and no one else in connection with the matters referred to in this announcement and will not be responsible to anyone other than IDS for providing the protections afforded to clients of Goldman Sachs International, or for providing advice in relation to the matters referred to in this announcement.

Barclays Bank PLC, acting through its Investment Bank ("Barclays"), which is authorised by the Prudential Regulation Authority and regulated in the United Kingdom by the Financial Conduct Authority and the Prudential Regulation Authority, is acting exclusively for IDS and no one else in connection with the subject matter of this announcement and will not be responsible to anyone other than IDS for providing the protections afforded to clients of Barclays nor for providing advice in relation to the subject matter of this announcement.

Forward-looking statements

This announcement contains certain forward-looking statements concerning the Company's business, financial condition, results of operations and certain plans, objectives, assumptions, projections, expectations or beliefs with respect to these items.

Forward-looking statements are sometimes, but not always, identified by their use of a date in the future or such words as 'anticipates', 'aims', 'due', 'could', 'may', 'will', 'would', 'should', 'expects', 'believes', 'intends', 'plans', 'potential', 'targets', 'goal', 'forecasts' or 'estimates' or similar expressions or negatives thereof.

Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the Company's actual financial condition, performance and results to differ materially from the plans, goals, objectives and expectations set out in the forward-looking statements included in this announcement.

 All written or verbal forward-looking statements, made in this announcement or made subsequently, which are attributable to the Company or any persons acting on its behalf are expressly qualified in their entirety by the factors referred to above. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements. No assurance can be given that the forward-looking statements in this document will be realised; actual events or results may differ materially as a result of risks and uncertainties facing the Company. Subject to compliance with applicable law and regulation, the Company does not intend to update the forward-looking statements in this document to reflect events or circumstances after the date of this document, and does not undertake any obligation to do so.

Disclosure requirements of the Code

Under Rule 8.3(a) of the Code, any person who is interested in 1% or more of any class of relevant securities of an offeree company or of any securities exchange offeror (being any offeror other than an offeror in respect of which it has been announced that its offer is, or is likely to be, solely in cash) must make an Opening Position Disclosure following the commencement of the offer period and, if later, following the announcement in which any securities exchange offeror is first identified. An Opening Position Disclosure must contain details of the person's interests and short positions in, and rights to subscribe for, any relevant securities of each of (i) the offeree company and (ii) any securities exchange offeror(s). An Opening Position Disclosure by a person to whom Rule 8.3(a) applies must be made by no later than 3.30 pm (London time) on the 10th business day following the commencement of the offer period and, if appropriate, by no later than 3.30 pm (London time) on the 10th business day following the announcement in which any securities exchange offeror is first identified. Relevant persons who deal in the relevant securities of the offeree company or of a securities exchange offeror prior to the deadline for making an Opening Position Disclosure must instead make a Dealing Disclosure.

Under Rule 8.3(b) of the Code, any person who is, or becomes, interested in 1% or more of any class of relevant securities of the offeree company or of any securities exchange offeror must make a Dealing Disclosure if the person deals in any relevant securities of the offeree company or of any securities exchange offeror. A Dealing Disclosure must contain details of the dealing concerned and of the person's interests and short positions in, and rights to subscribe for, any relevant securities of each of (i) the offeree company and (ii) any securities exchange offeror(s), save to the extent that these details have previously been disclosed under Rule 8. A Dealing Disclosure by a person to whom Rule 8.3(b) applies must be made by no later than 3.30 pm (London time) on the business day following the date of the relevant dealing.

If two or more persons act together pursuant to an agreement or understanding, whether formal or informal, to acquire or control an interest in relevant securities of an offeree company or a securities exchange offeror, they will be deemed to be a single person for the purpose of Rule 8.3.

Opening Position Disclosures must also be made by the offeree company and by any offeror and Dealing Disclosures must also be made by the offeree company, by any offeror and by any persons acting in concert with any of them (see Rules 8.1, 8.2 and 8.4).

Details of the offeree and offeror companies in respect of whose relevant securities Opening Position Disclosures and Dealing Disclosures must be made can be found in the Disclosure Table on the Takeover Panel's website at www.thetakeoverpanel.org.uk, including details of the number of relevant securities in issue, when the offer period commenced and when any offeror was first identified. You should contact the Panel's Market Surveillance Unit on [phone] if you are in any doubt as to whether you are required to make an Opening Position Disclosure or a Dealing Disclosure.

Website publication

In accordance with Rule 26.1 of the Code, a copy of this announcement will be available on IDS' website (www.internationaldistributionsservices.com) by no later than 12 noon (London time) on the business day following the date of this announcement. The contents of the website referred to in this announcement are not incorporated into and do not form part of this announcement.

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[1] Full year final quality of service performance will be issued in May following final data validation.

 

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