Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.
Amazon's aspirations of building a global logistics operation have spurred rumblings about whether a takeover of FedEx may be a cheaper and swifter means to an end. Is there any merit to the idea?
At the very least, it's an interesting thought experiment.
First, let's look at the pros. In an effort to curtail rising shipping costs, Amazon has built a bevy of distribution centers and tested alternative delivery methods. The $245 billion e-commerce giant reportedly wants to turn those logistics baby steps into a full-blown delivery network that can ferry goods from China to New York. Buying FedEx would certainly get Amazon a ready-made global operation in a hurry.
FedEx had 656 planes in its Express division as of November and uses about 200,000 vehicles and trailers across its network. It also pays some 300,000 employees to make the whole thing work. Building up that kind of system would take at least a decade, if not much longer. For one thing, Boeing and other aircraft suppliers don't just have 500 planes sitting around for the taking.
Whether it's cheaper or not depends on how big you think Amazon's logistics ambitions are. If it wanted to build a network identical to FedEx, we're talking at least tens of billions of dollars for the planes alone. Say Amazon wanted to start out with about 180 medium-body freighter planes and 20 wide-body freighters for bigger trips. Even taking into account some degree of a discount for buying in bulk, a plane order of that size could run Amazon in the range of $12 billion, according to estimates from Kevin Sterling of BB&T. And that would give it just a third of FedEx's air fleet without any trucks, real estate or additional employees.
Once you start tabulating that all up, maybe it is easier to just buy FedEx. Any buyer would probably have to pay a premium to the company's all-time high in June of $184.98. That puts a deal in the range of $60 billion, including debt. It's not chump change, but Amazon has about a third of that in cash and equivalents already. It's at least conceivable financially.
Now for the cons. Amazon doesn't really want to be FedEx. It wants to control its own (smaller) version of FedEx. In that respect, a deal really wouldn't be all that cheap.
There's an obvious benefit to Amazon in taking control over the delivery of goods sold on its site and those of smaller merchants with which it has a relationship. There's far less appeal in ferrying a package from my mom in Kansas to me in New York, for example. As noted here, it's also highly unlikely that major merchants such as Wal-Mart that compete with Amazon would want to use the e-commerce retailer for shipping services.
Of course, Amazon could just leave these types of deliveries to other providers, but then why would it go to the trouble of paying for all those capabilities in a FedEx acquisition? The point is, FedEx comes with some extra baggage that Amazon probably doesn't want or wouldn't be able to use to its advantage. That's not worth a premium.
Amazon still has work to do to build out a global logistics operation, but it's already taken those baby steps. It has more than 100 fulfillment facilities globally, sorting centers that function as hubs and an intercity delivery network in some areas. It could close the gaps in its current network for a quarter of what it would cost to buy FedEx, says Satish Jindel, a logistics consultant.
One way to do that could be through a series of smaller deals for regional carriers. Amazon already works with a number of these providers, which can offer faster and cheaper delivery than the national providers within their respective areas. Buying a few of these regional operators, such as closely held LaserShip Inc., would help give Amazon more control of the so-called "last mile" aspect of its delivery operations that it currently outsources -- without a $50 billion-plus tab.
Another option may be Air Transport Services Group. The company has a fleet of the Boeing 767 freighters that Amazon has reportedly expressed an interest in and Air Transport is adding flights for an unnamed customer widely believed to be Amazon. With a market value of about $740 million, it's a bargain way to add air transport capabilities.
That's more Amazon's style anyway. The biggest deal the company has done -- and its only one worth more than $1 billion -- was a real estate purchase. Amazon's preferred method is to work with and learn from partners, and then run them out of town (see: Borders). All signs point to it trying to do a similar thing in the shipping industry.
Actual prices are difficult to determine because buyers get a discount to the catalog price. The price may be lower than estimated if the discounts are more substantial.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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