FedEx makes strategic investment in TNT, potentially altering European delivery landscape.
Two years after European Union competition authorities nixed a merger between TNT Express and UPS, the European express carrier on April 7 conditionally accepted a $4.8 billion all-cash buyout offer from rival FedEx Corp. Company officials and analysts said the acquisition is a good fit with FedEx’s existing business, providing greater geographic coverage, more service offerings and the ability to reduce operating costs.
The move caps years of investor speculation about a tie-up between the American and European package delivery majors because of their respective needs and capabilities. It was well received by analysts who characterized it as changing the parcel playing field in Europe and FedEx’s long-term earnings power.
According to a joint release by the companies, FedEx’s offer price of 8 euros ($8.78) per share for Netherlands-based TNT represents a 33 percent premium over the April 2 closing price and 42 percent over the weighted average share price during the last three months. Dutch postal service Post NL, which once owned TNT and now controls 14.7 percent of the shares, has agreed to support the sale to FedEx.
TNT’s parcel delivery network covers Europe, where FedEx lacks a strong presence. FedEx Express is a major player in intercontinental and intra-European air express service, with an air hub in Paris. It even has some domestic operations in the United Kingdom and France, but does not have infrastructure and trucking assets to support domestic courier business throughout the continent. Company leaders have long sought a pan-European ground network to go along with their international air express business. TNT, on the other hand, has a very limited domestic operation in the United States. The deal would give FedEx a highly integrated global network that complements FedEx’s capabilities in North America and Asia, and matches up well with that of UPS.
TNT, with annual revenue of about $6.7 billion euros and 65,000 employees, has operations in Asia, the Middle East and other emerging markets, where it has struggled more. It delivers more than 1 million shipments a day utilizing a network of more than 1,000 depots and hubs, more than half of which are in Europe.
“We believe that this strategic acquisition will add significant value for FedEx shareowners, team members and customers around the globe,” FedEx Chairman and Chief Executive Officer Frederick Smith said in a statement. “This transaction allows us to quickly broaden our portfolio of international transportation solutions to take advantage of market trends—especially the continuing growth of global e-commerce—and positions FedEx for greater long-term profitable growth.”
Smith said in a call with reporters that the deal will “dramatically lower our cost to serve European markets by increasing density in our pick-up and delivery operation.” More terminals translate into shorter lengths of hauls for delivery trucks, which will make FedEx more competitive and also enhance cross-border e-commerce capabilities, officials explained. Although TNT’s network is more focused on business-to-business delivery, it complements the limited FedEx ground delivery system and is well positioned to take on business-to-consumer service. TNT also benefits FedEx through its significant heavy freight operation, and the ability to help fill FedEx planes on intercontinental routes, officials said.
Efficiency gains are also expected in hub and feeder operations, and support functions. And FedEx will be able to improve customer service, including earlier delivery and later pick-up times, Chief Financial Officer Alan Graf Jr. said.
The Memphis, Tenn.-based supply chain services company anticipates closing the TNT deal in the first half of 2016, but that it will not noticeably add value to earnings until after 2017 because of accounting charges for purchase fees and amortization of intangibles, Graf said. Plus, FedEx plans to aggressively invest in integrating the two companies during the first year, he added, although the European operation doesn’t require significant capital expenditures. Graf said the combined business will generate profit margins above TNT’s current targets, stressing the higher income will be the result of productivity improvements from combining the networks and broadening the portfolio for increased volume share, rather than a need to cut redundant operations.
“The real opportunity is to produce the transportation between the two companies at a significantly lower cost and then to bundle new revenue opportunities with a broader portfolio,” Smith said.
FedEx is on an expansion spree designed to put it on par with UPS in offering customers complete supply chain services in all geographic regions. It paid $1.4 billion in January to acquire GENCO, a large U.S. third party logistics provider that specializes in warehousing, packaging, e-commerce fulfillment and reverse logistics. In December, it spent $42 million for Bongo International, a small company that helps retailers with technology to enable online international sales and manage cross-border shipments. Last May, it also acquired a ground delivery business in southern Africa and is adding offices in Latin America. It is also investing in several large distribution centers in North America.
FedEx also has a huge ground parcel network in the United States, as well as domestic truckload and less-than-truckload freight divisions, and international freight management and customs brokerage segments—all designed to meet any shipping need for its customers. The Bongo deal underscores the importance FedEx has placed on servicing online retailers, who are expected to see sales double to more than $2 trillion in the next four years, according to Forrester Research.
FedEx said it will honor existing employment terms at TNT, which is unionized, unlike most of FedEx’s labor force. The lack of redundancy between the companies is good for workers, because few layoffs will be required to turn a profit, officials said.
The regional headquarters of the combined companies will be in the Amsterdam suburb of Hoofddorp. TNT’s hub in Liege will continue to be a major operations center, but FedEx will sell off TNT Express’ airline to comply with cabotage laws that do not allow domestic airlines to be majority owned by foreign companies. The intercontinental portion of air operations will eventually be transitioned to FedEx, which operates the largest cargo airline in the world.
EU regulators blocked UPS’s takeover of TNT in January 2013 on the grounds that the deal would concentrate too much power in one courier company since UPS already had a strong presence in many countries after a series of smaller acquisitions. UPS vehemently disagreed, stating that competition was strong in areas of the European Union where most parcel delivery activity takes place and that it proposed substantial remedies, including divestiture of assets, in countries where there were overlaps to alleviate any concerns that consumers would pay higher prices.
Ironically, according to Joaquín Mercado Sapiaín, an economist and mergers expert writing on the investment platform Seeking Alpha, the expectation was that FedEx would buy the divested assets. FedEx restrained itself and in the process helped sink UPS’s deal for TNT Express.
FedEx has a much smaller market share in Europe, which increases the chances of the deal being approved. In fact, the European Commission said in its decision against UPS that FedEx did not represent a significant European competitor that could counteract a UPS-TNT tie-up.
FedEx officials were optimistic that the European Union will approve the deal based on the relative size of TNT, FedEx and their primary competitors. FedEx’s ability to be a one-stop shop for local, regional and international delivery enhances customer service and offers a counterbalance to UPS and Deutsche Post’s DHL, they argued.
“We are very confident that we will get regulatory approval and the reason for that is it will be good for the market. There are two very strong players in this particular marketplace and by bringing TNT and FedEx together in the European segment of the market we believe we create a stronger third competitor and that is going to be very good for customers and shippers alike,” David Binks, president of FedEx Europe, said on CNBC.
According to Deutsche Post, DHL has a 41 percent share of the $6.5 billion time-definite express market in Europe, followed by UPS with 25 percent, TNT Express with 12 percent and FedEx with 10 percent.
DHL officials were quoted in the European press as saying that the company gained material market share from TNT during the drawn out EU review of the UPS deal and expects to do the same this time around as its competitor focuses on the regulatory process.
Analysts do not expect Deutsche Post or anyone else to make a counter offer.
The fact that the deal won’t result in reduced headcount also weighs in FedEx’s favor, according to Morgan Stanley transportation analyst William Greene.
The transaction must get regulatory approval in several countries besides the European Union, including China, Brazil and the United States.
“The combination of FedEx and TNT Express is not expected to raise antitrust concerns, principally as a result of the strengths of competitors in relevant markets,” the joint statement said.
The TNT takeover would essentially reduce the number of global express carriers to three. TNT was once an integrated logistics company like FedEx, UPS and DHL, but sold off its contract logistics business to investors behind what is now known as CEVA Logistics.
UPS originally offered 5.16 billion euros for TNT ($6.7 billion in March 2013). FedEx is paying less in part because the dollar has strengthened about 15 percent against the euro, taking off about $1 billion from the UPS offer price. TNT is also a smaller company today because it has sold its Chinese trucking business, slimmed down its domestic operation in Brazil, jettisoned some non-compensatory business, right-sized its Italian network, downsized its air fleet and terminated at least 4,000 jobs as part of a turnaround strategy. Its current plan is to cut 250 million euros in costs.
UPS projected a TNT takeover would add 400 million to 550 million euros to earnings within four years, but FedEx can expect about half that because of TNT’s reduced size and the fact that UPS based its gains almost entirely on cutting costs rather than revenue growth, Greene said.
Smith said the timing of the acquisition was influenced by the favorable exchange rate, the uptick in the European economy from lower oil prices and the new economic stimulus by the European Central Bank, and the impressive steps recently taken by TNT’s management to improve operations. In the past year, for example, TNT has significantly improved service levels for road transport.
Binks said low interest rates also played a factor. In a memo to clients, Greene said FedEx will have an estimated $4.5 billion in cash on its balance sheet by the end of May 2016, which will allow it to easily finance the deal at relatively low cost without taxing its balance sheet or credit rating.
Smith acknowledged that TNT has underperformed and lost some market share since the UPS transaction was shot down because of its smaller portfolio of services compared to UPS and DHL. TNT responded with the downsizing and investing more in its road network. FedEx hopes to win back market share once the integration is complete, the company founder added.
“This offer comes at a time of important transformations within TNT Express and we were fully geared to executing our standalone strategy. But while we did not solicit an acquisition, we truly believe that FedEx’s proposal, both from a financial and a non-financial view, is good news for all stakeholders,” TNT Express CEO Tex Gunning said of the tentative agreement. “Our people and customers can profit from the true global reach and expanded propositions, while with this offer our shareholders can already reap benefits today that otherwise would only have been available in the longer run.”
Gunning will remain in charge of the new FedEx European operation and assist in the integration of the two companies, planning for which officials said is already underway.
FedEx has a track record over the quarter century of successfully integrating large and small companies, going back to Flying Tigers for international express; Caliber, which is now FedEx Supply Chain Services; American Freightways, Viking and Watkins, which now comprise FedEx Freight, the largest LTL carrier in the United States; and Roadway Package Services, now FedEx Ground.
“FedEx is really good at buying fixer uppers and fixing them up. And this is definitely a fixer upper,” Donald Broughton, an analyst at Avondale Partners, said on the PBS program “Nightly Business Report.”
The integration will take three or four years, but after the first year the benefits of the acquisition will far outweigh the continued integration costs, Graf said.
“Execution is probably the greatest risk in the deal,” Greene wrote. “The acquisition of TNT Express is one of the more complex/transformative deals for FedEx, so there is plenty of risk surrounding successful integration of the companies. While every FedEx acquisition in the past hasn’t been a home run, the company has acquired and integrated a number of companies with great success.”
Other potential worries are that FedEx may need to invest more to beef up TNT than expected, deterioration in the European economy, and clashes with labor unions, according to Greene.
Officials said the TNT brand has significant value and that they will take their time deciding whether to replace the name. “There are certain parts of the world where we may want to retain the TNT brand because it is so strong,” Smith said.
Graf said the company’s top talent will be involved in combining all aspects of the two companies, from operations and information technology, to accounting and taxes. FedEx’s strong cash flow and balance sheet will allow it to absorb TNT without impacting modernization plans for its air fleet or other capital investments, he told reporters. The company will issue some debt to finance the transaction.
“For the long-term value of our shareholders this will be one of the biggest wins we’ve ever done,” Graf said. “We’ve been following this company for a very long time and we think it’s a wonderful fit everywhere.”
This article was published in the May 2015 issue of American Shipper.