UPS to Acquire TNT Express, Double European Presence

UPS Inc. last week announced its largest-ever acquisition, a $6.8 billion deal to buy Dutch package carrier TNT Express NV.

The move, announced on March 19, would diversify the largest transport company and at least double its European presence.

The deal would create a company with about $62 billion in annual revenue. Of that amount, about 64% would come from U.S. sources, compared with 74% today.

“With this combination, both UPS and TNT Express will significantly enhance their ability to serve our combined customers’ complex global logistics needs,” said Scott Davis, CEO of UPS, Atlanta. “The additional capabilities and broadened global footprint will support the growth and globalization of our customers’ businesses.”

New revenue gains for UPS would be most pronounced in the European and Asia/Pacific regions, which would generate 22% of UPS’ revenue after the deal, up from 14% now.

Adding TNT’s estimated 9.6% of European package business to UPS’ existing 7.7%, as estimated by consultant Transport Intelligence, would give UPS a 17.3% market share, creating near parity with DHL Express, Europe’s largest package carrier.

The purchase price is roughly four times UPS’ largest previous acquisition — the $1.3 billion purchase of Overnite Corp. in 2005.

One uncertainty is the effect on competitors such as FedEx Corp., whose market share in Europe is estimated by Transport Intelligence at less than 4%.

FedEx Chairman Frederick Smith last week would not comment specifically on the UPS/TNT deal, but said, “FedEx has a profitable multibillion-dollar business in Europe. We are very confident in our ability to improve results, primarily through organic growth.”

Robert W. Baird analyst Benjamin Hartford said some UPS/TNT customers could turn to FedEx, allowing the Memphis, Tenn.-based company to gain market share. It also could make acquisitions of smaller companies in Europe, the report said.

There was no comment from DHL Express as of press time for Transport Topics.

The announced timetable for the plan is a TNT shareholders’ meeting during the second quarter, with completion during the third quarter. One step that will be taken immediately is talks with union groups at TNT, the company said.

Two unions representing TNT workers in Europe issued a statement on March 21 saying they “hope to ensure that TNT and UPS workers are not pitted against each other during the transition.”

In the United States, UPS is the largest employer of workers in the Teamsters union, which declined comment on the announcement.

UPS and TNT together would have 475,000 employees, 269 aircraft and run more than 150,000 vehicles, based on information provided on their websites.

TNT had revenue of $9.51 billion last year, compared with $53.1 billion for UPS in 2011. TNT is struggling financially, generating just $100 million of pre-tax profit over the 2010-2011 period — while UPS racked up $11.7 billion in profit over the same period.

TNT’s U.S. presence today is limited, with revenue from all of North America and South America totaling barely 5% of 2011 sales.

The Dutch company’s strengths are the European and Asia/Pacific markets, which generated, respectively, about 63% and 24% of its revenue last year. Europe was TNT’s only profitable region last year.

The agreement offers both opportunities and risks, analyst reports said.

UPS “has its work cut out for it both in improving TNT margins and delivering on cost-synergy targets, all while keeping the restructuring costs in line,” Credit Suisse analyst Chris Ceraso said.

BB&T Capital Markets analyst Kevin Sterling said UPS would benefit from gaining control of TNT’s intra-European freight network, which accounts for nearly 25% of its revenue, because UPS could reduce its purchased transport costs on that continent.

UPS also can gain by opening more international markets for U.S. customers and increasing its presence in the automotive and industrial markets that represent 45% of TNT’s revenue in Europe, Sterling said.

Morgan Keegan analyst Arthur Hatfield said there is a risk of regulatory roadblocks that could force UPS to sell off some of TNT’s assets to win approval of the deal.

UPS, in its statement, said it “is confident that it will secure all relevant competition approvals.”

In addition to a larger global presence, UPS said its move would increase value for its shareholders, open new U.S. markets for TNT Express customers and improve technology for all customers.

The plan requires an 80% approval by TNT shareholders. Its largest shareholder, at 30%, is Post NL, the Dutch post office, which has pledged to support the deal. TNT Express was spun off from the Dutch postal operator last year.

UPS estimated it will be able to generate savings and revenue benefits of between $525 million and $725 million annually, once the integration is completed over a four-year period. Integration costs were estimated at $1 billion on a pre-tax basis.

UPS’ final offer was 54% higher than TNT’s share price when talks were first announced last month.