Shares in Royal Mail (RMG), drifted 0.1% lower to 413p after announcing the £210m acquisition of Canadian logistics company Rosenau.
There are three key implications. First, Royal Mail is expanding its international footprint through its international division GLS (General Logistics Systems).
Second, the group is reducing its dependence on the core UK market which is facing a multitude of structural headwinds. Third, the prospect of a demerger of the GLS division has been put back on the table.
SYNERGIES
The Rosenau acquisition will enable GLS to cover the vast majority of the Canadian population and deliver further growth and synergies.
The deal builds on Royal Mail’s 2018 £214 million acquisition of parcel delivery company Dicom, which it acquired from Chicago based private equity firm Wind Point Partners.
According to Royal Mail the Canadian parcel and freight market is growing at 5% per year. Moreover the Covid-19 pandemic has boosted on-line purchases, which has in turn accentuated demand for parcel and delivery services.
REDUCING DEPENDENCE ON UK MARKET
By expanding it international footprint, Royal Mail is reducing its reliance on the UK market that faces several structural challenges.
The group has suffered from a bloated cost base, an issue that is likely to see continued pressure in the short term as the group launches its seasonal recruitment drive. This may prove to be problematic given the wider staffing shortages in the economy.
Moreover the economic viability of the letters business has been questioned, and the group also has a considerable pension fund liability.
On a more positive note the Rosenau deal highlights the success of Royal Mail’s strategy of leveraging its GLS division to expand its international footprint.
The Rosenau acquisition will prompt investors to revisit the scale and scope of the Canadian operations. However GLS is also recording strong revenue growth in Spain, Germany and Eastern Europe. The prospect of a potential demerger of the GLS division is very much back on the table.
