FedEx Bids $4.8 Billion for TNT Two Years After UPS Deal

Updated on
Why Will Regulators Agree to FedEx, TNT Deal?

FedEx Corp. agreed to buy Dutch parcel-delivery company TNT Express NV for 4.4 billion euros ($4.8 billion), predicting it can succeed where bigger rival United Parcel Service Inc. was blocked by regulators in 2013.

TNT investors will receive 8 euros a share in cash, 33 percent more than the closing price on April 2, the most recent trading day. That’s less than UPS’s January 2012 offer of 9.50 euros, a reflection in part of a deal that has fewer synergies for FedEx, TNT Chairman Antony Burgmans said.

FedEx, calling the purchase a “match made in heaven,” said the timing was right for the approach, with a stronger dollar and a budding European recovery. FedEx has a chance to succeed where UPS failed as it has less overlap with TNT and has agreed to shed TNT’s airline operations in an effort to win approval.

“FedEx will know the pitfalls UPS faced,” said Damian Brewer, an analyst at RBC Capital Markets in London, adding the price is in line with similar deals. While FedEx’s offer is lower than what UPS was prepared to pay at the time, financial metrics at the Dutch company have deteriorated since, he said.

TNT rose 29 percent to 7.77 euros in Amsterdam, while FedEx jumped 3.9 percent to $173.14 at 10:02 a.m. in New York.

‘Very Aggressive’

“We plan to be very aggressive in the first year investing in the integration of this business,” FedEx Chief Financial Officer Alan Graf said on a conference call. TNT will have minimal impact on FedEx earnings in fiscal 2016 and 2017. “We expect TNT to be very accretive to earnings thereafter.”

UPS scrapped its bid in January 2013 after European competition regulators moved to block the deal, arguing that it would limit some shipping customers’ choices for next-day deliveries to just UPS and DHL, a unit of Deutsche Post AG. The watchdog formally blocked UPS’s TNT bid because the Atlanta-based company failed to find a suitable buyer for parts of TNT to ensure that competition for delivery services wouldn’t be squelched.

Adding TNT will bolster the European ground network for FedEx, the operator of the world’s largest cargo airline. Expansion in Europe is one pillar of Chief Executive Officer Fred Smith’s 2012 plan to boost profit by $1.7 billion.

Europe Focus

“We have long identified Europe as an area where we were focused on for growth because of our relatively small market share when compared to other parts of the world,” said Patrick Fitzgerald, FedEx senior vice president for marketing, in an interview. “It will drastically lower our costs to serve European markets by increasing density in our pickup and delivery operation.”

FedEx and TNT said they’re “confident that antitrust concerns, if any, can be addressed adequately in a timely fashion,” and that they expect to conclude the transaction in the first half of 2016.

“This is a much simpler deal than the previous deal, it is much more complementary, with less overlap,” Burgmans said at a press conference in Amsterdam. “That also means synergies will be less. We are as certain as can be that this deal will close in Brussels.”

FedEx said it has started making some preliminary inquiries about possible buyers for the TNT Express airline operations.

PostNL NV, the main mail service in the Netherlands, agreed to tender its 14.7 percent stake, TNT and FedEx said. The postal service will get 642 million euros in cash for its stake and will use the funds to cut debt, it said. The company rose as much as 19 percent in Dutch trading, while German rival Deutsche Post rose as much as 3 percent in Frankfurt.

Execution Risk

For TNT, completing the sale would mark success in its effort to find either a turnaround strategy or an alternative exit plan since the UPS bid fell apart.

A combination puts pressure on FedEx to finally turn around operations at TNT, which has lost a cumulative 673 million euros over four consecutive years. Should the transaction fail, TNT will receive 200 million euros as a reverse termination fee from FedEx, the same amount it got after the UPS offer fell apart.

While TNT CEO Tex Gunning said the risks tied to a turnaround will now be lower due to the financial muscle FedEx can provide, the U.S. express company now faces “significant integration risks” after TNT lost key personnel and is trying to “rebuild morale,” according to Brewer at RBC Capital.

TNT Disposals

TNT has been selling assets to bolster its finances and focus more on European overland transport. The company disposed of its Dutch fashion operations in 2014 and an unprofitable Chinese trucking unit in November 2013.

FedEx has a history of buying smaller companies around the globe, including in Poland, France, South Africa and Brazil. In January, the Memphis, Tennessee-based company closed its most-recent major purchase, the $1.4 billion acquisition of product-return firm Genco Distribution System Inc.

“There will be many opportunities as we move through the deal” for cost savings, David Binks, FedEx’s head of operations in Europe, said in an interview. “We believe that we have very complementary networks. TNT have a very strong operation on the ground, and we have a good reputation in the air. We are very strong in the U.S., they are very strong in Europe.”

FedEx’s financial adviser is JP Morgan Securities, and its legal advisers NautaDutilh NV and Baker & McKenzie. Goldman Sachs Group Inc. and Lazard acted as financial advisers for TNT, while Allen & Overy LLP was its legal adviser.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE