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2/17/2016 9:45:00 AM Write a Letter to the Editor Write a letter to the Editor

Analysis: Amazon-FedEx — Crazy or Worth Considering?

Chris Ratcliffe/Bloomberg News Inc.'s aspirations of building a global logistics operation have spurred rumblings about whether a takeover of FedEx Corp. may be a cheaper and swifter means to an end. Is there merit to the idea?

At the very least, it's an interesting thought experiment. First, let's look at the pros. In an effort to curtail rising shipping costs, Amazon has built a bevy of distribution centers and tested alternative delivery methods. The $245 billion e-commerce giant reportedly wants to turn those logistics baby steps into a full-blown delivery network that can ferry goods from China to New York. Buying FedEx certainly would get Amazon a ready-made global operation in a hurry.

FedEx had 656 planes in its Express division as of November and uses about 200,000 vehicles and trailers across its network. It also pays some 300,000 employees to make the whole thing work. Building up that kind of system would take at least a decade, if not much longer. For one thing, Boeing and other aircraft suppliers don't just have 500 planes sitting around for the taking. Whether it's cheaper or not depends on how big you think Amazon's logistics ambitions are.

If it wanted to build a network identical to FedEx's, we're talking at least tens of billions of dollars for the planes alone. Say Amazon wanted to start out with about 180 medium-body freighter planes and 20 wide-body freighters for bigger trips. Even taking into account some degree of a discount for buying in bulk, a plane order of that size could run Amazon in the range of $12 billion, according to estimates from Kevin Sterling of BB&T. And that would give it just a third of FedEx's air fleet without any trucks, real estate or additional employees.

Once you start tabulating that, maybe it is easier to just buy FedEx. Any buyer probably would have to pay a premium to the company's all-time high in June of $184.98. That puts a deal in the range of $60 billion, including debt. It's not chump change, but Amazon has about a third of that in cash and equivalents already. It's at least conceivable financially.

FedEx has slumped amid a few quarters of underwhelming earnings, but any buyer likely would have to pay a premium to its June high.

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By Brooke Sutherland
Bloomberg News

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