On the last day of July, the European Commission officially hit the pause button on FedEx’s proposed $4.8 billion acquisition of TNT Express, deciding collectively to take a longer look at the merger and what it might mean for European shippers and customers sending air freight to the continent.
The integrator expects the deal, which was announced in April, to close during the first half of 2016, and the word from both FedEx and TNT is that it’s still on track, but the commission’s move might have given industry watchers a pause. Or in the spirit of the prolific Yankees catcher Yogi Berra, this may seem like déjà vu all over again.
It’s been about two and a half years since the commission moved to block a $6.28 billion deal between UPS and TNT Express, ultimately deciding that a merger of the two entities would lead to higher prices for shippers and decrease competition. The commission had said a deal could go through after UPS sold off some of its European holdings, but that never came to fruition. This time around, the commission’s reasoning is much the same.
“Many businesses, and in particular e-commerce, rely heavily on affordable and reliable small-package delivery services, and many consumers depend on these services to ensure rapid and safe delivery of goods they have bought. The commission must, therefore, make sure that FedEx’s takeover of TNT would not impede effective competition and would not lead to higher prices for consumers,” the commission’s Margrethe Vestager said in a statement.
There are, however, two major differences between the previous deal and FedEx’s current bid, according to Kevin Sterling, BB&T Capital Markets’ managing director. While he fully expected extra scrutiny from European regulators, he said “I don’t know how, from their standpoint, they could justify not digging into it deeper.
Sterling added that FedEx isn’t nearly as pervasive as UPS is in Europe. According to FedEx, it shipped 210 million packages in and out of Europe in 2014. Sterling said that combining UPS and TNT would have given shippers a two-integrator solution, with DHL and a combined UPS and TNT serving as the two biggest options in Europe.
“FedEx has a smaller market share in Europe vs. UPS,” he said. “UPS and TNT would have been just as big, or bigger, than DHL. This deal still leaves three major players in the European market instead of just two… From that standpoint, FedEx has a much lower hurdle.”
TNT also has watched its presence dwindle in the European market, Sterling said. After the European Commission’s decision to block its merger with UPS, TNT continued to shift its holdings and organizational structure in line with a two-year revitalization strategy, divesting itself of its road business in China and starting the sale of its Dutch Fashion arm, among other moves. In December 2013, PostNL announced it would sell a chunk of its stake in TNT. By the second quarter of 2014, the company was reporting improved performance thanks to these initiatives, seeing huge jumps in year-over-year operating income and cost reductions, but sinking revenues. By the first quarter of 2015, the company was still reporting year-over-year revenue losses. Company executives have said FedEx’s offer was completely unsolicited.
“They almost need to find a partner, otherwise in a few years, who knows what’s left of them? You might be left with three players regardless of what the commission decides,” Sterling said.
Even with the cards seemingly in FedEx’s favor, Sterling still anticipated the commission’s move. He pointed out that FedEx won’t have an easier road than UPS, either, and FedEx and TNT executives likely would have been shocked had the commission let the deal go through without a closer look.
For their part, FedEx officials seem to be treating the commission’s move as part of the normal course of business.
“We will continue to work together with TNT Express to meet the European Commission’s need for additional due-diligence and are confident that the combination of both companies will increase competition and create benefits for customers,” FedEx Express’s president of Europe, David Binks, said in a statement. “We continue to make progress on all of the necessary regulatory steps around the world that would allow us to complete this transaction in the first half of 2016 and unite two great teams that share a passion for customer service.”
In an April news conference announcing the deal, Antony Burgmans, chairman of TNT’s supervisory board, said “deal certainty” was one of the defining factors of the proposal.
“We had a little experience ourselves two years ago, so you can see why we’re focused on this,” he said. “This is a much simpler deal than the UPS deal.”
Burgmans said there is less overlap with FedEx than UPS, which means there is less synergy between TNT and FedEx. “But on the other hand,” he noted, “the strategic fit is better.”
Burgmans continued: “We feel very confident. Last time we thought it was doable. This time we are as certain as can be.”
During the April press conference, FedEx Express President and Chief Executive Officer David Bronczek said he was “very confident” regulators would see the deal in a positive light.
“We know that there are two strong players in the marketplace. Now there’ll be three,” he said. “And at the end of the day, I think what the commission… would like to see is better competition.”
In the end, BB&T’s Sterling wouldn’t make a prediction about the deal’s final outcome, and the commission is far off from forming any opinions, but it wouldn’t be a huge shock, it seems, if this deal went through. TNT’s future may depend on it.
Ross, a former American Shipper editor, writes about air transport and freight issues. He can be reached by email.
This column was published in the October 2015 issue of American Shipper.