FedEx Corporation (FDX, Financial) announced the acquisition of Dutch logistics company TNT Express. This article discusses the reasons why the acquisition is a positive for FedEx in the long-term.
According to the joint press release by FedEx and TNT Express, FedEx has agreed to acquire TNT Express at an all-cash public offer of €8 per share and this implies a 33% premium over the closing price of April 2, 2015 and a 42% premium over the average closing price over the last three months. The acquisition represents an implied equity value for TNT Express at $4.8 billion. While this is the overview of the potential transaction, the benefits for FedEx are discussed below.
First, the transaction allows FedEx to make strong inroads in Europe and this will help the company achieve its objective of achieving robust global growth.
In particular TNT Express has a strong road platform and Liege hub in Europe and this will help FedEx expand its presence in the region. In addition, FedEx has a strong financial flexibility and the acquisition will help accelerate growth in the regions where TNT Express operates.
Further, according to the companies, TNT Express customers would also benefit from access to the FedEx portfolio of solutions, including global air express, freight forwarding, contract logistics and surface transportation capabilities. Therefore, making inroads into new markets coupled with an increased customer base (that is well serviced) will trigger strong growth for FedEx and for the integrated TNT Express clients.
From a funding perspective, the $4.8 billion transaction is likely to be financed through internal cash flows and through debt. I believe that this is not a point of concern considering the fact that FedEx has delivered and continues to deliver strong cash flows and the company has high financial flexibility. FedEx has generated free cash flow of $1.5 billion in FY13 and FY14 and even if the acquisition is fully debt funded, the company’s financial flexibility is high to take further debt and service debt comfortably.
I must mention here that TNT Express has been looking for a turnaround strategy in the last few years. The company’s margin has been depressed and I believe that the acquisition will be the turnaround strategy that TNT Express was looking for.
Therefore, the acquisition is a positive step for FedEx with the company aiming to grow at a robust pace over the next few years. The critical point is how well the company is integrated into FedEx once the acquisition is completed. FedEx is targeting an operating margin of 10% in the coming years and a similar operating margin for TNT Express business will certainly imply a successful acquisition in terms of regional expansion as well as in terms of profitability turnaround.
In conclusion, the acquisition is positive for FedEx and I maintain my positive outlook on the stock after the acquisition. In my view, the stock is certainly a good buy and hold with a 3-5 year investment horizon.
