S&P downgrades International Distribution Services to BBB- after takeover

Investing.com -- S&P Global Ratings has downgraded International Distribution Services (IDS) to ’BBB-’ from ’BBB’ following the company’s takeover by EP UK Bidco Ltd.

The rating agency also lowered its short-term rating on the UK-based postal services company to ’A-3’ from ’A-2’. The outlook remains stable.

The downgrade comes after Bidco received acceptances for over 90% of IDS shares. The offer closed for acceptance on Tuesday, and any outstanding shares will be acquired compulsorily.

S&P cited the significant increase in debt leverage resulting from the takeover, which was partly financed by £2.35 billion of debt. This includes £1.25 billion of bridge facilities maturing in 2026 and £1.1 billion of amortizing term loans maturing in 2030.

The rating agency expects IDS’s adjusted funds from operations (FFO) to debt ratio to fall to approximately 15%-20% in fiscal year 2026, ending March 31, 2026, compared to about 34% in fiscal 2025.

Total (EPA:TTEF) group debt, including lease liabilities, is projected to reach nearly £5.0 billion, or about £4.3 billion net of forecast available cash and short-term investments. Cash interest expense is expected to increase to about £170 million from approximately £100 million in fiscal 2025.

S&P forecasts adjusted EBITDA of £1.0 billion-£1.1 billion in fiscal 2026, up from about £825 million in fiscal 2025. This improvement reflects continued growth in Royal Mail (LON:IDSI)’s operating profit, supported by a sustained 4%-6% increase in parcel volumes and pricing initiatives.

The rating agency anticipates material improvements in IDS’s profitability over the next 24 months, with EBITDA projected to grow to £1.4 billion-£1.6 billion by fiscal 2027. This growth is expected to come from about £300 million in cost savings from universal service obligation reform and at least £100 million from initiatives implemented by the new owner.

As a result, S&P forecasts an improvement in IDS’s FFO to debt ratio to 28%-32% within 24 months.

EP Group AS (EPG), IDS’s new ultimate parent, has publicly stated its intention to maintain investment-grade ratings at IDS. The rating agency considers IDS to be a highly strategic subsidiary of EPG, contributing about 30% to group EBITDA in calendar year 2025.

S&P noted that capital returns from Royal Mail Group Ltd. to the new owner are restricted for five years following the acquisition unless Royal Mail has a net leverage ratio of 2x or lower, as part of the deed of undertaking to the UK government.

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