Stifel: FedEx-TNT integration may be ‘easier planned than executed’

The parcel giant announced today that after the official post-closing acceptance period, FedEx owns 98.45 percent of all TNT Express stock and will commence a statutory buy-out for the remaining shares in third quarter 2016.    FedEx Corp.’s integration with the Netherlands-based global express carrier TNT Express could prove to be “easier planned than executed,” according to industry analysts with the investment firm Stifel.
   The parcel giant officially closed its acquisition of TNT Express last week and said in a statement today that after the official post-closing acceptance period, FedEx owns 98.45 percent of all TNT Express stock and will commence a statutory buy-out for the remaining shares in third quarter 2016.
   Because FedEx now owns more than 95 percent of TNT shares, the company will also request that TNT be delisted from Euronext Amsterdam stock exchange.
   The result of the tie-up is that “European (and global) small package market has finally consolidated around three major players: DHL, FedEx, and UPS,” the Stifel Transportation & Logistics Research Group said in a recent investor update.
   Stifel said it was too early to predict implementation costs or potential synergies, but the companies have been crafting a plan for integration, which can now be revealed following completion of the deal.
   The firm was negative on the proposed acquisition of TNT by FedEx archrival UPS in 2012, primarily due to the opinion that large, overlapping network integrations tend to go poorly, the operative word there being “overlapping.”
   “With FedEx, however, we believe this is more of a ‘bolt-on’ than an ‘overlapping’ network integration (although we do anticipate significant costs, challenges, and hiccups), so there should be fewer issues, especially on the labor/infrastructure side, than UPS would have had.”
   According to Stifel, large-scale network integrations are “easier planned than executed.” Although the FedEx-TNT integration has yet to begin and the challenge of network overlap will not be nearly as great as with UPS, “there is still a fair sum of facility, personnel, systems, and cultural integration that must take place,” the firm said. “Management has commented that the cultural fit with TNT is a good one, and if true, that will make it easier.”
   Because TNT has been struggling to remain profitable and competitive for years, having under-invested in core assets and operating an inefficient hybrid LTL/parcel network, FedEx will have to invest significantly in IT and infrastructure in order to achieve its target margins and service levels, said Stifel. The firm expects earning accretion from the deal to be minimal in fiscal 2017, but that should increase over time if FedEx can improve network density and operating efficiency.
   As such, Stifel increased its earnings per share (EPS) estimates for 2017 and 2018 to include former TNT revenues and earnings (excluding any restructuring charges) and a lower tax rate.
   “We expect management to release estimated charges, capex needs, and synergy targets after it looks under the hood,” said Stifel. “At the earliest, it may provide some preliminary numbers on its June 21 earnings call.
   “The benefit from TNT is partially offset by reduced estimates for FedEx Freight due to undisciplined pricing and soft industry volumes and FedEx Ground due to reduced margin expansion expectations.”