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Corporate Mar 20, 2012

UPS’s international footprint to grow with TNT deal

Amsterdam/New York: United Parcel Service Inc will buy Dutch peer TNT Express for 5.2 billion euros to boost its position as the world's largest package delivery company outside the United States.

UPS will become the market leader in Europe and also gain access to TNT's stronger networks in the fast-growing Asian and Latin American markets, increasing the US company's global revenue to more than 45 billion euros in 2011 and leaving it with 477,000 employees.

Reuters

"TNT Express fits into UPS's long-term network plan," UPS Chief Executive Scott Davis told investors. "This broadens UPS's global footprint."

The deal will expand UPS's revenue outside the United States to 36 percent of its total, from 2 6 percent today, and increase its presence in Brazil and Australia, executives said. The acquisition is the largest by far in UPS's 104-year history.

The move sharply widens the gap between UPS and No. 2 FedEx Corp, which has a market share of about 3 percent in Europe.

TNT said on Monday its executive and supervisory boards unanimously supported UPS's offer of 9.5 euros per share, a premium of nearly 54 percent, up from a bid of 9 euros per share last month.

"At the price they're paying, we're not going to be jumping up and down for it, but it's not a bad deal and it's going to be a long-term positive," said Alan Lancz, president of Alan B. Lancz Inc in Toledo, Ohio, which holds UPS shares. "It's consistent with what we expect with management as far as trying to broaden out the global scale and keep costs low."

A deeper European economic slump than expected could dull the benefits, he said.

"The downside would be a longer economic slowdown than what's already anticipated and a lot more anemic recovery when recovery does occur," Lancz said. "But I think that's semi-priced-in as far as the purchase price."

TNT Express shares were up 1.1 percent at 9.44 euros in European trading at 1635 GMT. UPS shares were up 4 .2 percent, a six-year-high, in mid-afternoon trading on the New York Stock Exchange.

UPS will invest 1 billion euros beyond the purchase price over a four-year period to integrate TNT, and the company "intends to stay very high-quality on (credit) ratings," Chief Financial Officer Kurt Kuehn told analysts.

The company expects strong European exports and is committed to investing in the region despite current economic concerns.

"Is it the time to be shopping in Europe? It's a pretty cloudy environment," said Jeffrey Kauffman, managing director at Sterne Agee in New York. "Strategically, you want to buy assets when things are cheap, not when you've got to pay up, so strategically I think this makes a lot of sense."

Kauffman said Europe will be the biggest revenue stream from a TNT merger, but the potential footprint growth is global. "This really isn't just an investment in Europe, it's an investment in the Middle East, in Brazil, Australia, China - there's so much more to this than Europe."

Wall Street had been watching for a deal after TNT in mid-February rejected UPS's initial 4.9 billion euro bid. The companies remained in talks.

The bid from UPS came about nine months after TNT split from delivery company PostNL, with shareholders pressuring TNT to shake up its board and boost shareholder value.

The deal has raised concerns that smaller companies will find it harder to compete. Germany's Deutsche Post DHL , the closest rival in Europe, said the European Commission should examine the proposed takeover thoroughly.

TNT's biggest shareholder, PostNL , which owns a 29.8 percent stake, also said it backed the offer, which UPS said it would finance through a combination of $3 billion in available cash and new debt.

"The combination of the two companies ... will be enhanced and really deliver the global leader that will be unequalled," said TNT Express head Marie-Christine Lombard.

With falling profit and a poor outlook for 2012, TNT's management had come under intense pressure from activist shareholders, including Jana Partners and Alberta Investment Management Corp, to seek a buyer.

"There will be a great degree of execution risk inherent in a deal of this size and scope, with implementation expected over an approximately four-year time frame," Morgan Keegan equity research analysts said in a client note. "That being said, we project accretion of $0.21 per share in 2013 and with these higher projections our target price is increasing to 93.7 euros($124) from 87.65 euros ($116) per share and we maintain our outperform rating."

UPS has long looked at TNT as a way to help it expand in Europe, especially Britain, France and Germany. It said it was confident the European antitrust watchdog would clear the offer without undertaking a prolonged investigation.

Analysts said the company might need to sell some assets to ensure the deal wins approval.

"We expect some divestments will be needed for the competition clearances," DZ Bank analyst Robert Czerwensky said.

FedEx was perceived as a potential suitor at one point, and one that might offer a higher bid than UPS. But with less overlap, there were less savings to be gained in a TNT merger. And most analysts expect FedEx to follow through on its stated focus of expanding in Asia and possibly growing in Europe by buying some assets divested in this merger.

"As a matter of policy, we do not comment regarding corporate development matters," FedEx spokesman Jess Bunn said.

FedEx may discuss its plans further on Thursday after it reports third-quarter earnings.

UPS's Davis said it was "too early" to tell if European regulators would require the companies to sell off any operations but said he expects the deal to be approved.

"We're quite confident that all the necessary approvals will be obtained," Davis said.

A spokesman for Deutsche Post said the acquisition would further strengthen the power of a significant player in a market with limited participants.

Trade unions said UPS had agreed to continue collective labor agreements. The unions said they had not heard of any plans for job cuts, but analysts said the deal could affect thousands of employees.

"With TNT about two times as large as UPS in Europe, this could affect more than 20,000 jobs at TNT in Europe alone," said Kelper Capital Markets analyst Andre Mulder.

The businesses have overlap, but UPS's Davis said it was "way too early" to talk about job cuts.

The deal will bring annual cost savings of 400 million to 550 million euros in four years, UPS said. It said it will first spend a pretax 1.3 billion euros ($1.71 billion) on "implementation costs" to achieve those synergies, adding that the deal would boost UPS's earnings this year.

UPS expects the takeover to close in the third quarter. The acquisition will be financed with an equal mix of cash and debt, it said.

About two-thirds of TNT's revenue is from European customers, but it also has been steadily growing in China, India and Brazil, where it struggled to integrate its acquisitions.

UPS is in the midst of a $200 million expansion of its Cologne hub, and has recently grown through acquisitions.

The company carries about $11 billion in debt on its balance sheet and could tap credit lines for $12 billion in additional debt. The company has $4.1 billion in cash and $1.3 billion in marketable securities.

Reuters

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