UPS-TNT Deal Stirs Investor Doubt in EU Approval Struggle
United Parcel Service Inc. (UPS)’s 5.16 billion-euro ($6.6 billion) purchase of TNT Express NV (TNTE) faces growing investor skepticism as the world’s largest package- delivery company struggles to win European Union approval.
After TNT shares flirted with UPS’s 9.50-euro-a-share offer price, they have given up most of a 54 percent takeover premium and ended last week at 7.35 euros. That drop shows doubts about the sale after the top EU antitrust official urged “substantial remedies,” according to eight analysts surveyed by Bloomberg.
UPS is seeking to avoid concessions that would hobble its plan to double operations in Europe by buying Hoofddorp, Netherlands-based TNT. Since announcing the purchase March 19, Atlanta-based UPS has twice pushed back the target to complete the biggest deal in its 105-year history as the regulatory review continues.
“It’s going to be a lot more challenging than UPS thought,” said James Corridore, an S&P Capital IQ analyst in New York. “There’s a level where it would be too much, if they had to break apart TNT or divest too much, and the synergies wouldn’t be there.”
UPS will press its case today at a hearing with European Commission officials in Brussels. The company now projects a closing in early 2013, after setting an initial target for the third quarter and then the end of this year.
“We will work with the European Commission to address their concerns and look toward closing this process in early 2013,” Peggy Gardner, a spokeswoman, said in an e-mail.
TNT, Europe’s second-biggest express-delivery company, remains committed to the deal, said Ernst Moeksis, a spokesman for the Dutch operator.
Both TNT and UPS “are confident that European competition clearance will be achieved, allowing completion of the transaction in early 2013,” he said.
TNT was valued at 3.99 billion euros on Nov. 9 as the stock traded at the deepest discount to the offer price among pending all-cash European deals over $1 billion with a public acquirer, data compiled by Bloomberg show.
“The market is penciling in a 50-50 chance of the deal going through, and that uncertainty puts pressure on the share price,” said Dieter Furniere, a KBC Securities analyst in Brussels.
Furniere said there was a precedent for European Commission Competition Commissioner Joaquin Almunia’s Nov. 2 comment that the UPS-TNT deal raises “serious competition concerns.” That statement echoed remarks Almunia made in January before the collapse of Deutsche Boerse AG’s merger with NYSE Euronext (NYX), said Furniere, who recommends shareholders accept the UPS offer.
The analysts surveyed by Bloomberg said they still expect the deal to be approved. Regulators probably will demand UPS and TNT sell certain assets in Europe, according to the survey. TNT must also sell its airline because EU laws forbid foreign ownership of air carriers.
“The level of difficulty in getting this approved was a clean white sheet with light pencil marks,” said Donald Broughton, an Avondale Partners LLC analyst in St. Louis. “Now it’s something that’s been heavily shaded with a black crayon.”
The culture at UPS, whose engineers study details as small as eliminating left turns for drivers to save fuel, means the company ultimately will devise a successful strategy to win over regulators, said Broughton, who rates the shares as sell.
“UPS is careful and considered in making decisions, and they have a very well-established track record of once they decide to do X, they pursue X and figure out how to make it work,” he said. “They don’t make decisions like this lightly, and they tend to be stubborn and determined to make it work.”
Gabriele Accardo, an antitrust lawyer at Dandria Studio Legale in Rome, said the European Commission’s approach to UPS and TNT didn’t signal a tougher line on business combinations.
“It is just a matter of certain large deals happening these days, which is good,” he said. “The fact that we are still in recession mode should not be an excuse for allowing the creation of even bigger companies with less scrutiny.”
UPS’s merger agreement requires it to make “best efforts” to secure regulatory clearance and offer “reasonably satisfactory” concessions. UPS will pay a breakup fee to TNT of 200 million euros if it pulls out.
TNT investor KBL Richelieu Gestion opted to sell its stake rather than risk the deal collapsing, said Julien Quistrebert, who managed the stock for the Paris-based company. The sale of 4,500 shares came on June 29, according to data compiled by Bloomberg.
“The shares were almost at the offer price, and the risks from the antitrust were relatively high,” Quistrebert said by telephone. “You can see today that the negotiations are taking some time and are complicated. Even now, the company’s value is still relatively high.”
Today’s hearing in Brussels is a chance for UPS to argue against the European Commission’s views on how the deal would affect Europe’s delivery market. Regulators have told UPS that buying TNT would remove one of its few serious regional rivals, according to a person familiar with the officials’ objections.
UPS will probably say that Deutsche Post AG (DPW)’s DHL, FedEx Corp. (FDX) and other providers create enough competition, said Art Hatfield, a Raymond James & Associates analyst in Memphis, Tennessee. A good comparison is the U.S., where UPS and FedEx dominate package shipments, he said.
“This is probably the best parcel market on the planet, and pricing is competitive and it’s been all positive for the consumer and businesses,” Hatfield said. “Nobody is hurting.”
That’s not the situation for TNT in Europe. While TNT has managed to keep its overall market share steady at around 10 percent in the region, DHL is winning business in higher-margin segments, according to John Manners-Bell, an analyst at researcher Transport Intelligence.
TNT’s earnings before interest and taxes missed analysts’ estimates in two of the last three quarters. The company posted an operating loss of 105 million euros in 2011.
“UPS offered a big premium for TNT and it’s been losing money on an operating basis and there’s still a big question about how UPS is going to cut all these costs,” said Logan Purk, an Edward Jones & Co. analyst in St. Louis who has a hold rating on UPS. “There was little wiggle room to begin with, and a lot of things had to go perfect for this deal to make sense. That wiggle room is shrinking.”