US-based FedEx Corporation (FDX, Financial) has placed a proposal before European regulators to acquire Dutch delivery company TNT Express (TNTEY, Financial) in an all cash deal of $4.8 billion. If regulators approve the deal, FedEx would be catapulted to No. 2 spot in Europe with 17% share of the package delivery market in the country. It would put it ahead of rivals United Parcel Service Inc. (UPS, Financial), the largest package delivery company in the world, and just behind Deutsche Post’s DHL (DPSGY, Financial), which has the top spot with 19% market share. One of the objectives of Chairman and CEO of FedEx, Frederick W. Smith’s 2012 plan to grow profits to $1.7 billion, was expansion to European markets.
“This transaction allows us to quickly broaden our portfolio of international transportation solutions to take advantage of market trends – especially the continuing growth of global e-commerce – and positions FedEx for greater long-term profitable growth,” said in a company release.
In 2013, UPA placed a similar conditional agreement for $6.9 billion, before European regulators but failed to get approval. The combined companies would have cornered over 30% of the market in Europe and UPS was unable to find buyers for TNT operations that would have helped cut the deal down to size. In the new deal, TNT is looking to sell off its airlines operations to ensure smoother dealings with regulators.
Analysts predict that FedEx’s chances are good, or better than those of UPS, since TNT has lost market share since the failed UPS bid.
Breaking down the deal
As per the deal, TNT’s shareholders will receive €8.00 for each ordinary TNT Express share they hold. This offer price reflects a 33% premium over the closing price of TNT’s shares at the last trading day on April 2 and a 42% premium over share price of €5.63 over the last three months. The 14.7% stake in TNT held by Netherland’s leading mail service company, PostNL NV (PNL, Financial), will be handed over, the company release confirmed.
Risks in execution
TNT was put together when Thomas Nationwide Transport from Sydney was merged with Alltrans Group in 1967. It grew to its modern form in 1996 with one of the largest mergers in Dutch history when Koninklijke PTT Nederland acquired it for $2 billion. With this new deal, FedEx, operator of the largest cargo airlines in the world, faces “significant integration risks”, according to RBC Capital analysts. The European company has lost a total of €673 million over the last four years. Struggling to boost its finances, it sold its fashion operations in 2014 and a failing trucking unit in China in 2013.
Share study
FedEx is poised to absorb the risks. It has performed well in recent times, even though shares have fallen 4% this year till Monday. Trading on Tuesday saw shares rise by as much as 2.69% to close at $171.16. The previous close was at $166.67 and the 52 week high/low ranges between $130.64 and $183.51. Plus, FedEx didn’t suffer a season of failure, like UPS did with their second consecutive failed Christmas 2014, after it failed to manage the glut of packages during Christmas 2013. The global package delivery market shares are split between DHL at 41%, UPS at 25% and FedEx at 22% (inclusive of TNT).
With a bullish market standing, consensus recommendation on NASDAQ for FedEx shares is inching towards ‘Strong buy’ from ‘Buy’. Analysts forecast an annual EPS at $6.75, while NASDAQ 12 months rolling summaries pegs it at $8.71. FedEx has bettered analyst expectations over the quarters ended May 2014, August 2014 and the last quarter ended February 2015.
Matter of fact
TNT’s shares grew by 19% in Dutch trading while Tex Gunning, CEO of TNT Express, assured that “with this offer our shareholders can already reap benefits today that otherwise would only have been available in the longer run.”
The companies have scheduled an audio webcast, of the press conference to be held in Amsterdam today, for analysts and investors at 07:30 hours CDT (14:30 CET).
