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TRANSPORTATION October 22, 2012
UPS' $6.8 billion deal to buy TNT Express could become an unwanted package
UPS postpones closing date again as European regulators press firms over competitive issues.
By Mark B. Solomon
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UPS Inc.'s proposed $6.8 billion buy-out of Dutch express delivery firm TNT Express may be experiencing more than just a passing squall.
On Friday, Atlanta-based UPS said it received a "statement of objections" from the European Commission (EC), the executive body of the European Union, to the proposed purchase of TNT Express, based in Hoofddorf.
In a statement released Friday, UPS said the document—the contents of which have been kept confidential—"addresses the competitive effects of the intended merger on Europe's international express market."
UPS called the document a routine part of the 27-member EC's regulatory review process and said that both companies are expected to respond to regulators' concerns within the next couple of weeks.
Peggy Gardner, a UPS spokeswoman, said the EC statement "helps to further focus the areas of discussion moving forward" and that it doesn't "prejudge the outcome."
Still the statement of objections has forced UPS to extend the deadline to complete the transaction for the second time since both companies formally agreed to the deal on March 19. The initial deadline was Aug. 31, which was then pushed back to Nov. 9 due to competitive concerns raised in Europe. On Friday, UPS said the deadline has now been extended to early 2013. Initially, UPS had not anticipated any regulatory static over the deal.
UPS said it remains committed to the acquisition. The issue is likely to be raised tomorrow during UPS' scheduled analyst call to discuss its third-quarter results. Given the hush-hush climate surrounding the deal, however, it is likely executives will provide no new information.
The main sticking point could be a disagreement over the size of the European parcel market. That wouldn't be surprising, since analysts have proffered conflicting market share estimates since the transaction was announced in February. One estimate that appears to stick was made by New York-based investment firm Wolfe Trahan & Co., which pegged TNT Express as the market leader with 18 percent, followed by DHL Express with 16 percent, UPS with 14 percent, and FedEx Corp. with 4 percent.
The EC's review process comes as the Euro-zone grapples with a major financial crisis mostly afflicting its southern region. Given the current turbulence, David G. Ross, transport analyst at Stifel, Nicolaus & Co., surmised that the EC might be loath to approve any transaction that eliminates a competitor from the market. Ross added, however, that the body rarely vetoes deals like this one.
He did speculate that as a condition of approving the deal, the EC might require a divestiture of assets in countries where the two firms have significant market concentration. He would not comment on which countries would be ripe for divestiture.
UPS said in its statement that parcel competition in Europe is already brisk because it involves "multiple players who offer similar services." UPS said the combined entity would actually enhance the continent's competitive landscape by creating a "more efficient logistics market."
TNT Express' strength is its intra-European business, though it also serves the intra-China, Southeast Asian, and Brazilian markets. Its U.S. operations are confined to connecting the country to international markets. And even there, the company's footprint is almost nonexistent.
Ross, for one, is not keen on the deal, saying that beyond the cost of the purchase, the subsequent integration would be expensive and more difficult to execute than UPS assumes. UPS already has a significant and profitable presence in Europe, and the company would be better off growing its Asian and Brazilian operations in-house instead of buying TNT Express' "second-rate operations" in those markets, he said.
Keep away from FedEx?
Many of those following the deal have speculated that UPS' move on TNT Express was partly motivated by a desire to keep it out of FedEx's hands and block its rival from establishing a major foothold in Europe via a major acquisition.
FedEx, for its part, has expressed no interest in a counter-offer, saying it could grow nicely in Europe through organic expansion and smaller, more targeted acquisitions known in the trade as "tuck-ins."
The other major player in the market, DHL, has been silent on its intentions so far. Experts say it is doubtful DHL will make a bid for TNT Express for fear of raising the ire of European antitrust regulators. However, DHL and its owner, German postal and logistics giant Deutsche Post, wield significant influence in Brussels. Both could use their combined heft to either get the deal blocked or force conditions on UPS that could dilute the impact of controlling more than 30 percent of the intra-European parcel market.
DHL could have other, more personal motivations to block a UPS-TNT Express deal. In 2003, UPS opposed DHL's proposed acquisition of Airborne Express, then the third-largest U.S. parcel carrier. The transaction was eventually approved. According to those close to the transaction, UPS' opposition still rankles, even though in retrospect DHL would have been better off walking away as the acquisition set the stage for six years of multi-billion dollar losses that eventually led DHL to abandon the domestic U.S. market.
If the current deal is blocked, it would be hard to fathom TNT Express' staying independent for long as its competitiveness has faltered in recent years. When the company was split off from the Dutch postal system in May 2011, rumors swirled that it was put on a standalone basis to prep it for sale. By mid-2011, TNT Express' stock had plunged to multi-year lows as it sustained large losses due to the contraction in Europe and operating costs that spiraled out of control.
In addition, Marie-Christine Lombard, who was CEO at the time the deal was announced, suddenly resigned at the end of September to pursue interests outside the industry. The timing of her decision was not warmly received by the company's supervisory board. "It is regrettable that Marie-Christine has decided to leave TNT Express now," said Antony Burgmans, its chairman, at the time her resignation was announced.
These events seem to have affected the company's internal culture as well. A parcel industry executive who spoke on condition of anonymity said inertia has set in as TNT Express waits to be sold. In the meantime, the company risks becoming—if it already hasn't--the fourth player in a three-chair European parcel game.
"I think TNT had been on cruise control for a long time just waiting to be sold to somebody, and therefore has lost vision and mission and internal leadership," the executive said. "The senior guys just want their [compensation] packages so they can get on with life."