As TNT Express cajoles UPS to sweeten its $6.5 billion takeover offer, rivals FedEx and DHL Express are scrambling to react to a transformative deal likely to trigger further consolidation of the global express shipping industry.
FedEx could trump UPS’s 9 euro-per-share ($12) offer, setting off a bidding war that UPS would likely win, although at a much higher price than it budgeted for. But that’s unlikely, according to industry analysts, because UPS has a much stronger balance sheet, and FedEx is in the middle of a costly investment program and focusing on the Asia-U.S. market.
A UPS takeover of TNT — probably valuing the Dutch company at nearly $8 billion — would allow FedEx to pursue its policy of growing its European presence through smaller bolt-on acquisitions, however. European antitrust regulators likely would require UPS to shed assets in the Netherlands, Belgium, the U.K. and Germany to ensure its acquisition of TNT didn’t stifle competition in those markets.
A merged UPS-TNT would split the European express package sector into two top players and the rest. TNT has an 18 percent market share, followed by DHL with 16 percent and UPS with 14 percent, according to the Dutch company. FedEx accounts for 4 percent with the remaining 48 percent divided between scores of bit players, many of which are subcontractors to the Big Three.
TNT’s European business is the key attraction of a company whose operating margin has more than halved since 2006 and is struggling to keep pace with UPS, DHL and FedEx in the global market. It made an operating profit of $465 million in Europe in 2011, but lost $468 million in the Americas and $99 million in the Asia-Pacific region. It has close relationships with European multinationals, which account for around two-thirds of its revenue.
Europe is the ace in TNT’s negotiations with UPS, the Atlanta-based company that has waited more than a decade for the Dutch company to come into play. “We have a great presence in European countries, so I would say there is no reason why that cannot grow independently,” said Bernard Bot, TNT’s chief financial officer.
TNT became a more compelling target in 2006, when the $2 billion sale of its forwarding and logistics business to Los Angeles-based Apollo Management slimmed it down to a (sluggish) postal and (fast-growing) express business. It became a pure express operator — and a logical takeover target — last May when it was split off from Dutch postal operator PostNL, which still retains a 29.9 percent stake in the company and says it will not sell “in current circumstances.”
TNT would be UPS’s biggest acquisition, dwarfing the $1.3 billion takeover of U.S. less-than-truckload carrier Overnite Transportation in 2005 and the biggest deal in the express industry: DHL’s $7.6 billion purchase of the U.K.’s Exel in the same year. Driving UPS’s expansion is the acquisition of some 30 small companies since 1999, most recently Kiala, a Brussels-based company specializing in the delivery of Internet orders, in mid-February.
Another attraction of taking over TNT — on top of estimated $450 million of synergies — is its 20 percent share of the Brazilian express market and a growing business in China that has contributed to an estimated 11 percent Asian market share, matching FedEx and ahead of UPS’s 8 percent.
TNT, however, is looking for buyers or partners for its underperforming Brazilian and Chinese operations. It’s still paying the price for the bungled integration of Express o Mercurio, acquired in 2007, and Expresso o Arcatuba, acquired in 2009, that led to the loss of disgruntled clients. It’s also struggling with a steep slump in international and domestic shipments in China.
Even as it negotiated with UPS, TNT announced it would refocus on its core European operations and reduce its international exposure through partnerships, joint ventures or sales of overseas assets, mainly in China and Brazil, to stem rising losses and achieve sustainable profitability.
At first glance, a net loss of $351 million in 2011 against a profit of $86 million in 2010 would appear to undermine TNT’s effort to squeeze a higher price from UPS and attract other suitors. But UPS knows it will have to pay a greater premium for the once-in-a-lifetime chance to become a top-two player in Europe when its archrival FedEx has its attention fixed on Asia.
“Our franchise in Europe is unrivaled, with its unique service portfolio, dense networks and leading presence in all countries,” TNT CEO Marie-Christine Lombard said. “This franchise gives us confidence for the future.”
It’s a sales pitch that’s likely to deliver a higher payout to TNT shareholders and spur a strategic re-evaluation at DHL Express and FedEx in a business about to lose its fourth-largest operator.
Contact Bruce Barnard at email@example.com.