Why TNT Acquisition Is A Good Deal For FedEx

FedEx (NYSE:FDX) recently announced that it has offered to purchase TNT Express for an all-cash price of €8 per share, or $4.8 billion, a premium of 33% over the closing price of TNT’s stock on April 2. ^[1] The deal comes two years after UPS (NYSE:UPS) withdrew an offer due to regulatory issues. FedEx, however, believes that its deal should go through without any problems. FedEx, which generates more than six times TNT’s revenue, will benefit significantly from the acquisition since it should lead to a massive increase in its market share in Europe.

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What Went Wrong With UPS-TNT Acquisition

In 2012, UPS had bid $6.8 billion to purchase TNT. However, the deal was scrapped in 2013 as European antitrust regulators raised objections. The primary concern was the creation of a duopoly, where customers in Europe would be left to choose between UPS-TNT and DHL. Though UPS had offered to counter this by planning to support a small parcel delivery company, DPD, the regulator believed that DPD would not be a viable competitor to the new large entity. At that time, the only other player who would have proved to be a likely competitor was “not interested” in TNT’s assets. That player was FedEx.

FedEx now believes that TNT will prove to be a significant value addition. The company believes that antitrust regulators should not have any of the same concerns they had at the time of the UPS-TNT acquisition talks. This is primarily because FedEx does not have a large market share in Europe. Therefore, a merger between FedEx and TNT will not result in a logistics giant that can significantly alter market dynamics.

FedEx Could See Market Share and Profit Improvement, Volume Growth

FedEx’s bid of $4.8 billion is relatively cheap compared to UPS’ $6.8 billion, given that TNT’s stock has declined only 5% since UPS first showed interest in TNT. We believe that there are two reasons behind this. Firstly, UPS’ bid would have included a premium for the possible cost synergies due to the acquisition. However, FedEx would not be able to generate such synergies due to its small presence in Europe. Secondly, TNT has been suffering for the past two years due to its restructuring efforts, which have pressured its bottom line and brought down the company’s value. In the fourth quarter of 2014, TNT reported a €137 million loss. ^[2]

The FedEx-TNT deal is appealing not only because of the cheaper price tag, but also because of the massive increase in market share that FedEx will witness in Europe. According to 2013 data, FedEx is one of the smallest logistics integrators in Europe with a market share of 5%. ^[3] DHL leads with 19%, followed by UPS at 16% and TNT at 12%. Once the deal closes by the first half of 2016, subject to regulatory approval, FedEx would become the second largest logistics player in Europe. The acquisition also serves the company’s goal of improving profits. FedEx has been trying to increase its presence in Europe for quite some time, since it plays an important role in lowering costs, which should contribute to the CEO’s plan to boost Express profits by $1.6 billion by the end of FY 2016. ^[4] To this end, FedEx has also opened 100 stations across 11 European countries since 2011.

FedEx’s increased market share in Europe should also help the company capitalize on the growth in the region. The European Central Bank now forecasts the euro-zone GDP to grow 1.5% in 2015 and 1.9% in 2016, driven by the quantitative easing program launched in March and declining oil prices. ^[5] Also, a recent survey showed that price discounting had helped drive growth in major European economies in March, which saw new orders grow at the fastest rate since May 2011. ^[6] A stronger U.S. dollar will likely make trade in the euro region more favorable, which could help drive volumes for FedEx.

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1. FedEx and TNT Express Agree on Recommended All-Cash Public Offer for All TNT Express Shares, April 7, 2015, www.fedex.com [↩]
2. TNT’s Q4 2014 Earnings Press Release, February 17, 2015, www.tnt.com [↩]
3. FedEx agrees to buy TNT Express for €4.4bn, April 7, 2014, www.ft.com [↩]
4. FedEx Roadshow Presentation, March 18, 2015, www.fedex.com [↩]
5. Quantitative easing and the euro, March 9, 2015, www.economist.com [↩]
6. Euro zone price discounting drives growth in activity, April 7, 2015, www.reuters.com [↩]