TNT Express Faces Investor Pressure for Improved UPS Deal

TNT Express Faces Investor Pressure to Get Improved UPS Deal
TNT employees process incoming and outgoing freight at Liege Airport in Grace-Hollogne. Photographer: Jock Fistick/Bloomberg

TNT Express NV, Europe’s second-largest express-delivery service, is facing pressure to seal an improved sale agreement with United Parcel Service Inc. as investor confidence in its ability to improve margins flags.

TNT Express, which said Feb. 17 it rejected a 4.89 billion-euro ($6.43 billion) takeover offer from UPS, is seeking a bid higher than the current 9 euros per share, according to a person familiar with the negotiations who asked not to be identified because the talks are private. The bid represented a 42 percent premium on the stock’s Feb. 17 closing price in Amsterdam.

The Dutch company’s board is also unhappy with conditions attached to the current offer that may require divestitures to win regulatory approval and possibly lead to job cuts, the person said. TNT Express is focusing on the talks with Atlanta-based UPS because FedEx Corp. has thus far shown little interest in bidding, the person said.

“The key for them is to ensure that UPS doesn’t walk away with the company at that 9 euros per share, but actually shares some of the future synergies with shareholders,” said Damian Brewer, a London-based RBC Capital Markets analyst who rates TNT “underperform,” adding the share price is unlikely to reach 9 euros before 2015 as a standalone company. “If you’re not prepared to wait, then UPS’s bid realizes your money earlier.”

Shares Surge

TNT Express surged 60 percent to 10.18 euros today in Amsterdam trading, 13 percent higher than the offer price of 9 euros. The shares have advanced 76 percent this year, valuing the Hoofddorp, Netherlands-based company at 5.5 billion euros.

TNT Express was spun off in May from the Dutch postal operator, which is now named PostNL and retains 29.9 percent of the company, according to data compiled by Bloomberg. PostNL climbed 50 percent in Amsterdam today to 4.96 euros.

TNT Express’s profit margin has more than halved since 2006, when, as the package-delivery unit of its former parent, earnings before interest and taxes hit 9.6 percent of revenue. In 2010, adjusted Ebit represented 4.5 percent of revenue.

“Investors need to see evidence that the company is able to get back to its historical margins,” said James Rasteh, president of New York-based White Eagle Partners LLC, which holds a TNT stake of less than 1 percent. “This lack of faith is creating a remarkable opportunity for UPS.”

Spokesmen for TNT; PostNL, the largest investor; and Jana Partners, the third-largest, declined to comment when contacted yesterday.

Strong Balance Sheet

A bid from UPS, which is already the world’s largest package-delivery company, or its main competitor, FedEx, has been speculated about for years as the U.S. companies study European expansion. That talk gained momentum after the spinoff.

“They have a very strong balance sheet; they could easily take over TNT at an even higher price,” Amsterdam-based ABN Amro analyst Maarten Bakker said of UPS. “Road operations and depots would probably have to be divested in Benelux and the U.K.”

UPS’s offer was revised and increased following discussions with TNT, the company said in a statement Feb. 17. Peggy Gardner, a UPS spokeswoman, declined then to comment beyond the statement. Jess Bunn, a spokesman for Memphis, Tennessee-based FedEx, also declined on Feb. 17 to comment, citing a company policy against discussing “corporate development matters.”

Overlapping operations, particularly in Europe, could produce synergies for UPS in excess of 400 million euros, Amsterdam-based Kepler markets analyst Andre Mulder, who recommends buying TNT shares, said by telephone. A “good price” would be 11 euros, he said.

Last Opportunity

“This is a once-in-a-lifetime opportunity,” Mulder said. “Of the four major players globally, TNT is the smallest one, so it’s the last opportunity.”

The UPS bid valued TNT at 1.04 times total assets, compared with a median multiple of 0.58 in 33 acquisitions of transportation services companies in Western Europe in the past 10 years, Bloomberg analysis shows. The 42 percent premium compares with an average of 15 percent in more than 270 deals in the same period.

UPS completed the purchase last week of Brussels-based delivery firm Kiala to bolster operations in Belgium, France, the Netherlands, Spain and Luxembourg, and the company has made several smaller takeovers in recent years, said Thompson Davis analyst David Campbell, who recommends buying UPS and FedEx.

TNT Losses

UPS had a 7.7 percent share of the European express and parcels service market in 2010, compared with Fedex’s 3.3 percent and TNT Express’s 9.6 percent, according to figures from Transport Intelligence. Deutsche Post AG’s DHL unit is the biggest express delivery service in the region with 17.6 percent of the market.

TNT posted a net loss of 97 million euros for the first nine months of 2011 compared with a profit of 62 million euros a year earlier. TNT is in the midst of a 50 million-euro program to reduce “indirect costs” and plans to report full-year earnings tomorrow.

The company cut its 2011 target operating margin for Europe, the Middle East and Africa to 8 percent to 9 percent in October from an earlier target of 9 percent or more. UPS hasn’t posted an annual loss since going public in 1999 and ended the third quarter with $4.13 billion in cash and near-cash items.

TNT, whose name derives from the postwar Australian company Thomas Nationwide Transport, sold its Indian domestic road business in December and has been hurt by restructuring costs at its loss-making Brazilian operations.

TNT “needs to be bought, pure and simple,” said Cathy Roberson, an Atlanta-based logistics analyst for Transport Intelligence. “From a global perspective I don’t see how they can continue alone as things currently stand.”

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