Olympic Javelins Power UPS Bid to Ride Out Europe Slump: Freight
United Parcel Service Inc. (UPS) is betting sailboats and javelins will catapult it to the forefront of Europe’s package-delivery business as the Olympic Games help it ride out the region’s recession.
The world’s largest package delivery company will shift more than 30 million items as part of its contract to support the Olympic and Paralympic competitions in London that start on July 27 and end Sept. 9. At the same time, the company is courting investors to consolidate its position in Europe with a $6.3 billion purchase of Dutch carrier TNT Express NV. (TNTE)
That deal would put UPS on an equal footing in Europe with Deutsche Post AG (DPW)’s DHL, the market leader, pitting them in a fight for dominance as the region’s economy struggles to grow. With European Central Bank President Mario Draghi predicting a “mild recovery” by the end of the year, a successful Olympics operation could provide a platform for UPS’s expansion.
“Europe won’t be in recession forever,” Helane Becker, an analyst at Dahlman Rose & Co. in New York with a “hold” rating on UPS, said in a telephone interview. “These problems will eventually get sorted out and UPS will be there.”
Expanding in Europe is “critically urgent” for UPS as its domestic U.S. market is saturated, Becker said, adding that the Olympics could provide “a jumping-off point” for expansion.
While the euro-area economy may shrink this year, the International Monetary Fund sees growth returning in 2013 with a a 0.7 percent expansion. For the 27-country European Union, which includes the U.K., the forecast is for no growth this year and a 1 percent rise in gross domestic product in 2013.
Shares in Atlanta-based UPS have risen 7.4 percent this year, matching the Standard & Poor’s 500 Index (SPX) and compared with a 21 percent increase for Deutsche Post. Combined with Hoofddorp, Netherlands-based TNT, UPS would command more than $60 billion in annual revenue.
Britain will welcome 14,700 athletes from more than 200 countries for the Olympic and Paralympic Games, and the events will be watched by billions of people around the world. About 11 million tickets have been sold for the competitions, which involve 46 sports.
For UPS, that means delivering 1 million pieces of sporting equipment such as javelins, racing bikes and sailing boats, as well as anti-doping equipment and Olympic medals, to 34 competition and training venues. The London Games will eclipse the 2008 Beijing Olympics, when UPS moved 19 million items.
Pursuing the acquisition of TNT as it juggles the Olympics has heightened the risk to UPS’s reputation, according to Jean- Paul Louisot, a professor of risk management at the University of Paris-Sorbonne.
“It’s clear that the stakes of the games are higher than they would have been otherwise,” Louisot said in a telephone interview. “It’s worth investing more in the security and safety of the operations than it would’ve normally been.”
The risk to companies involved in such a high-profile event were underlined in the past week, when G4S Plc (GFS) failed to deliver enough security personnel, forcing the government to deploy 3,500 extra soldiers. The security provider’s shares have fallen 17 percent since July 11 and Chief Executive Officer Nick Buckles appeared before lawmakers yesterday to explain the failure.
“If we mess up, then obviously it’s very visible,” Cindy Miller, head of UPS’s U.K., Ireland and Nordic operations, said in a telephone interview. “We see Europe in general as such an important market despite some economic difficulties that are going on.” The UPS’s Olympics operation has experienced no delays and is on schedule, she added.
Britain, which is struggling to recover from a recession, is counting on a smooth running of the Olympics to help bolster London’s international profile. In the short term, Goldman Sachs Group Inc. forecasts the games may boost third-quarter gross domestic product by as much as 0.4 percentage point.
UPS posted first-quarter net income of $1 a share in April, compared with the average estimate of $1.01 in a Bloomberg News survey of 23 analysts. Revenue gained 4.4 percent to $13.1 billion.
The company’s planned 5.16 billion-euro ($6.3 billion) purchase of TNT is the biggest deal in its 105-year history. It says the acquisition will produce pretax cost savings of 400 million euros to 550 million euros annually after four years.
TNT, which agreed to accept the bid of 9.50 euros a share in March, will hold an investor meeting on Aug. 6 to brief shareholders on the takeover. The U.S. courier on July 13 extended the offer period to the fourth quarter because the European Commission needs more time to examine the impact of the transaction.
“Their margin for error is smaller,” Logan Purk, an equity analyst at Edward Jones & Co. in St. Louis, said in an interview, with reference to UPS chasing TNT during the Olympics. “It’s a big step for them because this is by far their biggest acquisition. It gives them the premier status in Europe and we don’t doubt that and I think that’s a positive.”
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