UPS will pay 9.50 euros a share in cash for the region’s second-largest express delivery company, up from a bid last month of 9 euros per share and 54 percent higher than the closing price Feb. 16, the day before the talks were made public, the companies said in a joint statement today.Atlanta-based UPS’s purchase of TNT will put the company on equal footing in Europe with Deutsche Post’s DHL, the region’s largest delivery operator. UPS, which will have 45 billion euros in revenue following the takeover of unprofitable TNT, expects the combination to bring pre-tax cost savings of 400 million euros to 550 million euros annually after four years.
“I thought that a lot of shareholders would have accepted 9 euros,” said Neil Glynn, a London-based Credit Suisse analyst who has a “neutral” rating on TNT Express. “I think UPS is paying a very, very big number. The synergies they’re seeing are pre-tax, it’s important to remember.”
TNT rose as much as 20 cents, or 2.1 percent, to 9.54 euros and was up 1.1 percent as of 12:17 p.m. in Amsterdam trading, giving the Hoofddorp, Netherlands-based company a market value of 5.13 billion euros. UPS closed down 0.7 percent at $78.41 in New York on March 16, valuing the company at $75.2 billion.
TNT announced plans last month to refocus operations on Europe, where its operating profit was 356 million euros last year, after reporting an overall operating loss of 105 million euros in 2011. Losses were 360 million euros in the Americas and 76 million euros in the Asia-Pacific region.
“TNT’s business outside of Europe was not of a large enough scale to merit a wait-and-see stance,” said Edgar Taverne, a portfolio manager in the Dutch city of Utrecht at Syntrus Achmea, which manages less than 1 percent of TNT stock on behalf of parent Achmea Holding NV. “The 9.50 euros-per- share price is fair. This was about right for the standalone express business.”
Investment in TNT means that UPS will not in the short term meet its target of a 25 percent return on investor capital, UPS Chief Financial Officer Kurt Kuehn said on a conference call. Cost savings will be primarily found in intra-national delivery services, the two companies’ air networks and in administration and procurement operations, he said. The cost of combining with TNT over the four-year period will be about 1 billion euros.
UPS, the world’s largest package delivery company, expects to receive regulatory approval for the deal by the end of the third quarter, the CFO said, adding that it’s too early to say what divestitures might be needed to satisfy antitrust concerns.
“We are confident that we will receive all required approvals and expect to receive competition clearance from the European Commission in phase one,” Kuehn said.
UPS controlled 7.7 percent of the European express-parcels market in 2010, compared with TNT’s 9.6 percent, according to industry researcher Transport Intelligence. Combined, they would be about as large as DHL, which had a 17.6 percent share.
Deutsche Post (DPW) expects antitrust regulators to examine the deal very closely, said Dirk Klasen, a Bonn-based spokesman for the German company. A takeover of this scale and complexity makes such an evaluation imperative, he said, adding that the focus would probably be on the European operations.
A bid by UPS or FedEx Corp. (FDX) had been fodder for industry speculation for years as the U.S. companies studied expansion in Europe. Antony Burgmans, the TNT Express board chairman, said today that a counterbid from FedEx was “highly unlikely.” FedEx does not comment on its competitors, said Baerbel Bussenius, a company spokeswoman based in Brussels.
UPS seeks a minimum acceptance rate of 80 percent of shareholders. TNT’s management and supervisory boards recommend accepting the deal, they said. TNT was spun off in May from the Dutch postal operator, PostNL NV (PNL), which is still the largest owner. PostNL said today it will tender its 29.8 percent stake.
At 9.50 euros a share, the deal values TNT at 13 times its last four quarters’ earnings before interest, taxes, depreciation and amortization, compared with a median of 10 times trailing Ebitda in nine other similar deals, according to data compiled by Bloomberg.
“The offer is disappointingly low,” said Andre Mulder, an Amsterdam-based Kepler Capital Markets analyst, who has a “buy” rating on TNT. “If you compare it to the price when the company was split off last May, it’s only a few tenths of cents higher. I do expect some of the shareholders to say that this isn’t really a premium.”
UPS does not rule out cutting jobs at TNT, Chief Executive Officer Scott Davis said at a press conference today in Amsterdam, adding that the company looks “to attrition first before we have forced redundancies.”
While UPS intends to retain the Cologne-Bonn airport as its main air cargo hub in Europe, the company has no plans to shut TNT’s Liege facility, which employs 1,400 people, Davis said. UPS will cease to use the TNT brand in the long term, he said.
UPS has an AA- rating from Standard & Poor’s and an Aa3 grade from Moody’s Investors Service. That’s the fourth-highest investment level in both cases. UPS, known for its brown vans and trucks, has $13.3 billion in bonds and loan facilities outstanding, of which $2.3 billion falls due this year, according to data compiled by Bloomberg. Its debt burden is the same size as a year ago, the data show.
Buying TNT will be UPS’s biggest purchase since the company was founded in 1907 as a bicycle-messenger service. The deal tops the 2005 acquisition of Overnite Corp. (OVNT) for about $1.25 billion in cash, which gave UPS the ability to make U.S. land shipments of parcels too large to be lifted by a driver.
International packages generate the most revenue for UPS, at $19.30 each in 2011, compared with $9.30 per domestic parcel. The $12.2 billion in sales for that business last year was 23 percent of UPS’s $53.1 billion total, which the company doesn’t disclose on a regional or country-by-country basis. Following the TNT purchase, international revenue will rise to 36 percent of overall sales, UPS said today.
TNT, which employs 77,500 people and whose name derives from the postwar Australian company Thomas Nationwide Transport, sold its Indian domestic road business in December and has been hurt by costs from revamping unprofitable Brazilian operations.
“The strength of TNT is as a European franchise,” Chief Executive Officer Marie-Christine Lombard said at the Amsterdam press conference. “We’ve always missed the U.S. link; it was a well-known issue for us. This combination will benefit our customer base by being able to offer a U.S. capability.”
The company has a 570 million euro revolving loan facility, which hadn’t been drawn down as of Dec. 31, and no bonds, according to data compiled by Bloomberg. It has a BBB+ credit rating from Standard & Poor’s, the eighth-highest grade, while Moody’s Investors Service rates it a level lower at Baa2.
Morgan Stanley (MS), UBS AG (UBSN) and Bank of America’s Merrill Lynch unit were financial advisers for UPS. TNT Express worked with Goldman Sachs Group Inc. (GS) and Lazard Ltd. (LAZ) advised the Dutch company’s supervisory board. Freshfields Bruckhaus Deringer LLP was UPS’s legal adviser and Allen & Overy LLP worked with TNT.