FedEx’s TNT Offer Shows Less Is More Three Years Later: Real M&A

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While FedEx Corp. is offering $2 billion less for TNT Express NV than United Parcel Service Inc. did three years ago, it’s still the best deal that the Dutch company’s shareholders are likely to get.

Taking into account the slide in TNT’s earnings since European regulators blocked UPS’s bid, FedEx’s $4.8 billion offer is actually almost twice as expensive. After subtracting net cash, it’s valued at closer to 4 billion euros ($4.3 billion), according to data compiled by Bloomberg. At about 24 times profit, it’s one of the priciest multiples ever paid in the European transport-services industry.

FedEx’s proposal of 8 euros a share is also 43 percent higher than where analysts had seen TNT’s stock trading over the next year: 5.59 euros. After UPS scrapped its bid in 2013, FedEx elected to wait and gauge a European recovery and TNT’s financial health before deciding on a takeover, according to a person familiar with the matter.

“The TNT holders should feel rescued,” Tom Burnett, director of research at New York-based Wall Street Access, which specializes in mergers and event-driven analysis, said in a phone interview. “They’re getting a very strong, financially secure buyer, and the combined company is going to be very strong if it’s allowed to go through.”

TNT shares rose 28 percent Tuesday to 7.69 euros, signaling traders aren’t betting on a competing offer. UPS is struggling with balancing its peak-season shipping operations, and is still awaiting a decision on its appeal of the European Union’s deal rejection. UPS has said the motion doesn’t signal any remaining TNT interest.

Antitrust Approval

FedEx, operator of the world’s biggest cargo airline, should have an easier path to approval because it has a smaller European market share and has already proposed divesting TNT’s airline operations, Maarten Bakker, an analyst at ABN Amro Bank NV, wrote in a report Tuesday.

“It’s not a bird-in-the-hand situation, where you’ve got an offer and you’re hoping for another offer,” said Sachin Shah, a special situations and merger-arbitrage strategist at New York-based Albert Fried & Co. Should UPS make another run at TNT, “whatever their offer is, it may not trump 8 euros from FedEx. FedEx has the highest probability of getting this to the finish line.”

DPD, the parcel-delivery service of Frances’s La Poste, or Royal Mail Plc’s General Logistics Systems could be interested in TNT, along with private-equity firms, though the likelihood of them making a move is low, according to Andre Mulder of Kepler Cheuvreux. While Mulder estimates that FedEx’s proposal is about one euro below the fair value of TNT, he sees 2015 as another year of market-share losses for the company.

“Seems like a done deal,” he wrote in a report Tuesday.

Telescope View

TNT had about 162 million euros in earnings before interest, taxes, depreciation and amortization in 2014, according to data compiled by Bloomberg. That’s the least since it was spun off in 2011 from Dutch postal operator PostNL NV.

By offering 24 times that, FedEx is betting that bringing TNT under its tutelage will help improve profitability, said Burnett of Wall Street Access. The multiple works out closer to 10 when using 2016 consensus estimates, according to an analysis by Lee Klaskow and Talon Custer of Bloomberg Intelligence.

“Properties like this come up rarely and if you’re FedEX and you have an opportunity now, you’re just going to jump on it, even if the multiple looks aggressive based on the current earnings picture,” Burnett said. “You obviously have a telescope out there and you’re hoping the margins can return to where they were two or three years ago.”

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