International Distribution Services (IDSLN; NR/BBB Neg/NR) S&P Affirms

Cheap view on Euro IDSLN28s still valid at Z+156/B+200/4.6%. Equities have held flat around 333pence since revised offer was agreed to by the IDS board. Regulatory approval the final hurdle that's causing stock to sit ~10% shy of the 370p acquisition price.

• The IG rating affirmation/language that were put into final offer from EP was indicative to us then of discussions with S&P clearing it. Today's affirmation seems to echo that but S&P is careful on adding "at least 1-notch" and not giving any guarantees.
• S&P's numbers on debt EP will add are tad higher than those quoted by BBG on a interview with EP group. We had £2.3b in total from that vs. S&P quoting £2.85b (we take S&P's amounts now) which includes £1.25b in bridge loans, £1.1b amortizing term loan & £500m multi-currency unsecured RCF. Traded bonds are all snr unsecured.
• It notes the conditions in the final offer that imposes return of capital restrictions for first 5 years based on leverage. We see the conditions limiting "return of value" defined as "any distribution, return of capital, non-arm's length transfer of assets, upstream loan or repayment of principal on downstream loan" unless net leverage ratio would be at or below 2:1 post-return of value.
• S&P has not assumed any universal service obligation (USO) reforms and adds if IDS proposed changes are passed it could lead to rating upside.
• Note IDS still has beta to earnings/rating risk on deal not closing - though losing IG ratings from S&P is low there (under its base case it will be stabilised at BBB by FY26).

S&P (today): "If the takeover is completed as planned, we understand that the group's absolute debt would likely increase under its new ownership. This could lead us to lower IDS's stand-alone credit profile, although the financial policy of the group remains uncertain. In any case, we would likely lower the rating on IDS by one notch because our 'bbb-' group credit profile (GCP) on EPCG is one notch below our current rating on IDS."

EP's revised offer (29th May); "The financing of the Acquisition is structured so that the investment grade credit rating of IDS is expected to be maintained. Following completion of the Acquisition, IDS is expected to be considered a highly strategic subsidiary of EP by the relevant ratings agencies. It is EP's intention to elevate IDS to a core subsidiary of EP, meaning that the rating of IDS would not be lower than the rating of EP...EP takes a conservative approach to its capital structure and intends to continue operating EP on the basis that its current investment grade rating profile is maintained."