FDX-TNT Acquisition: Risks, Rewards & Competition

Europe is presently one of the most sought after regions for package delivery companies FedEx (NYSE:FDX) and UPS (NYSE:UPS), as the region is expected to show strong growth in the next couple of years. The European Commission now forecasts real GDP in the euro area to grow 1.5% in 2015 and 1.9% in 2016, driven by the quantitative easing program launched in March and declining oil prices. ^[1] Besides, 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. ^[2] A stronger U.S. dollar is also likely to make trade in the euro region more favorable, which should prove lucrative for package and freight delivery companies.

In order to capitalize on the growth, FedEx has been actively pursuing expansion strategies in Europe, one of which is the TNT acquisition. In this article, we take a look at the risks and rewards involved in FedEx’s growth strategy in the region.

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FedEx’s TNT Acquisition To Significantly Boost Market Share

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.

Last month, FedEx (NYSE:FDX) announced that it had offered to purchase TNT Express for an all-cash price of €8 per share, or €4.4 billion, a premium of 33% over the closing price of TNT’s stock on April 2. ^[3] 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 because of FedEx’s small presence in Europe. Therefore, a merger between FedEx and TNT will not result in a logistics giant that can significantly alter market dynamics.

FedEx plans to finance the purchase through a mix of available cash and new debt. The company will be paying approximately €1.5 billion from its cash pool, which was $3.48 billion as on February 28. ^[4] FedEx will make new debt arrangements of €2.0 billion, while using an existing credit facility for financing the remaining €0.9 billion.

FedEx’s TNT acquisition should lead to a massive increase in its market share in Europe. According to 2013 data, FedEx is one of the smallest logistics integrators in Europe with a market share of 5%. ^[5] 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, as 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. ^[6] To this end, FedEx has also opened 100 stations across 11 European countries since 2011.

One of the major risks that FedEx faces with the deal is the likelihood of being burdened by a company whose performance has been gradually declining. 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 first quarter of 2015, TNT reported a €19 million loss, ^[7] and in the quarter before that, it reported a €137 million loss. ^[8] We believe that it is because of the continued decline in TNT’s profits that FedEx was able to negotiate a lower price than what UPS had bid in 2012.

Had there been a significant synergistic value in the deal, the risks of purchasing a poorly performing company such as TNT, would have been low. However, because of FedEx’s small presence in Europe, there is little chance of significant synergies once TNT is consolidated with the company.

FedEx To Face Tough Competition From UPS

Though the deal puts FedEx ahead of UPS in Europe, the question is whether it will be able to sustain its lead. UPS’ expansion plans and solid growth momentum in the region might help the company regain its position. Last month, UPS announced that it intends to invest $1.06 billion in the region, which should help increase its presence. ^[9] Additionally, Europe has been one of the strongest growing regions for UPS for the past few quarters, as opposed to TNT’s continuous decline in the region. UPS’s European export volume increased over 9% in the first quarter of 2015 and 12% in 2014, with particular strength in the intra-European trade lanes and the Europe-to-U.S. trade lane. ^{[10] [11]}

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1. Spring 2015 Economic Forecast: Tailwinds support the recovery, May 5, 2015, European Commission’s Website [↩]
2. Euro zone price discounting drives growth in activity, April 7, 2015, www.reuters.com [↩]
3. FedEx and TNT Express Agree on Recommended All-Cash Public Offer for All TNT Express Shares, April 7, 2015, FedEx News Release [↩]
4. Update on the Intended Offer by FedEx for TNT Express, May 13, 2015, FedEx News Release [↩]
5. FedEx agrees to buy TNT Express for €4.4bn, April 7, 2014, www.ft.com [↩]
6. FedEx Roadshow Presentation, March 18, 2015, www.fedex.com [↩]
7. TNT’s Q1 2015 Earnings Press Release, April 28, 2015, www.tnt.com [↩]
8. TNT’s Q4 2014 Earnings Press Release, February 17, 2015, www.tnt.com [↩]
9. UPS to invest $1.06 billion in Europe: Wirtschaftswoche, April 12, 2015, Reuters [↩]
10. UPS’s Q1 2015 10-Q SEC Filing, SEC’s Website [↩]
11. UPS’s 2014 10-K SEC Filing, SEC’s Website [↩]