Europe Gives FedEx a Bargain
Fedex Corp.'s takeover bid for Dutch rival TNT Express shows U.S. companies have reasons to go shopping in Europe beyond gaming the tax system. For one thing, the euro's collapse makes takeovers the cheapest they've been, in foreign exchange terms, in more than a decade. Moreover, as the tie-up between Heinz and Kraft announced last month suggests, it's a good time for U.S. companies to spread their wings internationally -- and especially in Europe.
The TNT purchase price of 4.4 billion euros announced today translates to a dollar investment for FedEx of $4.8 billion; just a year ago, the cost would have been more than $6 billion, before the euro's nosedive. Moreover, the FedEx offer of 8 euros per share is significantly less than United Parcel Service's failed 2013 bid at 9.5 euros that was abandoned after European antitrust regulators stepped in.
FedEx's bargain is coming in the form of damaged goods: TNT had a loss in the fourth quarter after abandoning a target to deliver an annual operating profit margin of at least 8 percent, and said in February that this year would be "a challenging year of transition." Nevertheless, TNT's European parcel-delivery fleet offers an opening for FedEx to offset a flatlining air-cargo market:
The real driver of the deal may be the opportunity it gives FedEx to expand outside of the U.S. International revenue for FedEx has been steady for the past couple of years at a bit less than 40 percent of total revenue. TNT makes 75 percent of its revenue in Europe, with the rest coming from Asia, the Middle East and Africa. UPS, by contrast, makes just 22 percent of its revenue in the international market, although that's up from 14 percent in 2000. And according to a UPS investor presentation about the overall market published last month, international carrier business is expected to outpace the U.S. domestic market in the coming years for revenue, profit growth and margins:
The same UPS presentation illustrates how the parcel-delivery industry is banking on a surge in Internet shopping to deliver growth. (Not shown on the charts is the potential impact of either click-to-collect -- in which online orders are picked up in stores -- or Amazon drones bypassing the planes, trains and automobiles of the bespoke mail deliverers.) Global demand is forecast to outpace U.S. expansion, with both accelerating far faster than gross domestic product:
After years of being outpaced by UPS, FedEx has stolen a march on its biggest competitor in the past year:
The FedEx/TNT deal might still unravel if European regulators get involved. In May 2014, the European Commission published the reasons for its decision to block UPS's plans, saying the takeover would "significantly impede effective competition" in 15 countries including Sweden, the Netherlands and Denmark. FedEx, according to UPS comments cited in the document, had "played a key role in the investigation acting almost as a ‘plaintiff’." It seems reasonable to assume UPS might seek revenge by objecting to the FedEx transaction.
The mood music in the London analyst community, though, suggests competition concerns are less pronounced this time around. Analysts at Berenberg Bank, for example, calculate FedEx has just 10 percent of the small package market in Europe; buying TNT will give it about 25 percent, in line with what UPS already has and less than Deutsche Post's DHL unit commands.
More U.S. takeovers of European companies should probably follow. The purchasing power of the dollar may struggle to maintain its current potency, especially if a weak U.S. earnings season prompts U.S. authorities to start bemoaning the dollar's strength. More importantly, though, the prevailing economic backdrop implies that expanding overseas at a time when the U.S. recovery may be stalling makes sense. Europe's economy is barely out of the starting blocks. But there's enough evidence that a rally may be on the way to make Europe an attractive hunting ground for internationally-minded U.S. executives.
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