TNT Left at Altar Gets No Immediate FedEx Deal: Real M&A

For TNT Express NV shareholders pining for a rescue from FedEx Corp. after a scrapped takeover sent the stock reeling to record-low valuations, it could be a long wait.

United Parcel Service Inc., the world’s biggest package-delivery company, terminated a 5.16 billion-euro ($6.9 billion) bid for TNT yesterday after European regulators signaled they may block the deal. TNT plunged 41 percent to 4.84 euros for the lowest multiples of profit and sales since the Hoofddorp, Netherlands-based company was spun off in 2011, according to data compiled by Bloomberg. FedEx will wait to see whether TNT’s operations and financial health deteriorate further before deciding whether to consider acquiring all or part of the company, a person familiar with the matter said.

With PostNL NV, TNT’s biggest shareholder, saying it may try again to sell the company, FedEx is the best hope for a buyer as it tries to expand in Europe and would face fewer regulatory hurdles than UPS, said Kepler Capital Markets. Credit Agricole SA said FedEx, if it even bids, is likely to wait at least 12 months to better gauge demand in Europe and TNT’s turnaround efforts in Brazil. Still, BB&T Corp. said FedEx doesn’t have enough cash for a takeover as big as TNT.

“I wouldn’t rule out that FedEx is potentially interested, but not in the short term,” Beat Keiser, a Zurich-based analyst for Credit Agricole, said in a telephone interview. Any prospective buyer is “going to want more clarity” on the health of TNT’s operations.

FedEx Pursuit

FedEx may consider making a run at TNT, according to another person familiar with the matter, who asked not to be identified because the plans aren’t public. The global package and freight company watched the failure of the UPS deal with interest, the person said.

FedEx won’t overpay for TNT and will wait to see if the company weakens to an acceptable price, the other person said. If TNT has a fire sale, FedEx would be an interested bidder, the person said.

“As a matter of policy, we do not comment on corporate development matters,” Jess Bunn, a spokesman for Memphis, Tennessee-based FedEx, said in an e-mailed statement.

When asked if TNT will seek a new buyer or be receptive to a bid from FedEx, Ernst Moeksis, a spokesman for TNT, said in an e-mail that “management will now solely focus on executing the business strategy and will uphold its fiduciary responsibility.”

Insufficient Remedies

Today, shares of TNT rose 5.7 percent to 5.12 euros in Amsterdam, the biggest gain since talks between TNT and UPS were first disclosed in February.

After UPS agreed to buy TNT in March for 9.50 euros a share, European antitrust officials informed the companies last week that the latest remedies in the competition review were insufficient, TNT said yesterday.

While Atlanta-based UPS had revised its proposed concessions to include the sale of assets and the offering of air-network access to rivals, the European Commission was trying to create another company with similar market power to fill TNT’s void, European Union Competition Commissioner Joaquin Almunia told reporters last week.

The deal will be formally terminated once the “inevitable” prohibition ruling has been received, TNT said. Almunia will reach a decision on the case by Feb. 5, spokesman Antoine Colombani said.

TNT’s shares slumped 41 percent yesterday to 4.84 euros, lower than the stock’s closing price of 6.34 euros before deal talks with UPS were first made public last February.

PostNL’s Plans

The decline left TNT trading at 0.37 times its sales in the past 12 months, the cheapest since it was spun off from Dutch postal operator PostNL in May 2011, according to data compiled by Bloomberg. Its enterprise value also sank to a record low of 6.2 times earnings before interest, taxes, depreciation and amortization, the data show.

Before the UPS deal, “people were valuing TNT on a standalone basis with the option of a transaction,” Stephen Furlong, a Dublin-based analyst for J&E Davy Holdings, said in a phone interview. “It was an obvious takeout candidate. Now it’s a standalone without that optionality.”

PostNL, which owns a 30 percent stake in TNT, also fell yesterday, sliding 36 percent for its biggest one-day plunge. The Amsterdam-based company may renew attempts to sell TNT in the future, PostNL Chief Executive Officer Herna Verhagen said in an e-mailed statement.

UPS Acquisitions

FedEx is the most likely remaining suitor for TNT, said Andre Mulder, an Amsterdam-based analyst for Kepler Capital, as a bid from Deutsche Post AG’s DHL, already the biggest express-delivery company in Europe, would likely draw the same regulatory pressure that derailed UPS’s deal.

UPS will pursue smaller European acquisitions and growth in its own business after its TNT purchase fell apart, said people familiar with the matter, who asked not to be identified because the plans aren’t public.

“I’m not sure they want to deal with the European Commission anymore,” Kevin Sterling, a Richmond, Virginia-based analyst at BB&T, said in a phone interview. “I think they’ll let others have their turn.”

Regulators would be less concerned about a tie-up of FedEx and TNT because the combined company would still have a smaller share of the European market than Deutsche Post, Mulder said. A takeover of TNT by UPS would have created a duopoly, said Credit Agricole’s Keiser.

Tough Review?

An acquisition by FedEx would reduce the market to “three strong players,” the minimum desired by the EU Commission, Keiser said. “But if UPS would have acquired it, you would have had two dominant players with a market share of around 40 percent, and the third player would have had just 10 percent.”

Not everyone agrees that regulators would be more accommodating to a FedEx bid. Helane Becker, a New York-based analyst at Dahlman Rose & Co., said that such a deal would still be eliminating a competitor from the market.

“It would be tough to get done,” Becker said in a phone interview. “The bottom line is, I think, that’s what everybody is finding. I think it’s just going to be difficult to get done.”

FedEx could seek to purchase TNT down the road to bolster its network in Europe, where it currently lags behind DHL and UPS, said David Abraham, a London-based event-driven strategist at BTIG LLC.

It’s worth it for FedEx to wait a year to see how demand develops in Europe, where TNT has had lackluster growth, and track the progress of TNT’s revamp in Brazil, Keiser said. TNT’s total revenue climbed less than 1 percent in each of the last three reported quarters, data compiled by Bloomberg show.

‘Right Time’

While TNT was aiming for its Brazil operations to break even by the end of 2012, Bernard Bot, the interim CEO, said in October that “prior expectations of the turnaround proved to be too optimistic.”

FedEx will wait to bid until it’s the “right time, right place,” BTIG’s Abraham said. “UPS can’t make a counter offer if FedEx did make an offer because of the antitrust issues, and FedEx also very cleverly has kind of bought its time by waiting to see how the situation pans out.”

Instead, Becker at Dahlman Rose said FedEx may expand its European presence through smaller acquisitions after struggling to compete in the market in the past. In 1992, FedEx shuttered its intra-European operations and domestic businesses in Italy, Germany, France and the U.K. after an economic slowdown spurred losses.

TNT Languishing

FedEx has not started any kind of due diligence and wouldn’t want to pay nearly the 9.50 euros a share that UPS had offered, one of the people said. Plus, FedEx has been building its own ground delivery operations in Europe and may want to continue to grow organically, the person said.

Today, FedEx shares rose 14 cents to $98.56 at 11:57 a.m. in New York, heading for the highest closing price since May 2008.

With TNT’s operations languishing, FedEx may be poised to win market share on its own, according to Jim Corridore, a New York-based equity analyst at Standard & Poor’s.

“If you have a company that’s struggling, maybe you don’t need to acquire them,” Corridore said in a phone interview. “Maybe you just need to continue to beat them the way you have been.”

That may be the best option for FedEx as it gears up to replenish its aging aircraft fleet, said Sterling of BB&T. In December, FedEx forecast capital expenditures of about $3.9 billion, including aircraft costs, in 2013. The company said in October that it plans to increase profit by $1.7 billion in three years by eliminating jobs and replacing fuel-guzzling planes. As of November, FedEx had $2.5 billion in cash, compared with UPS’s $8.4 billion in September, data compiled by Bloomberg show.

Deal Bandwidth

FedEx doesn’t “have the bandwidth, the balance sheet or the cash flow that UPS had to take on deals this size,” Sterling said. “To buy it as a whole right now, I just don’t see that happening.”

Still, FedEx may be lured to parts of TNT if the European carrier is willing to break up, Sterling said. FedEx could even bid for the whole company if a depressed valuation eventually forces a fire sale, he said.

“At the end of the day, TNT needs a suitor,” Sterling said. “TNT is struggling both operationally and financially. FedEx is in a good position just to wait this out and let TNT come to them.”

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