It’s not entirely surprising that FedEx has agreed a deal to take over TNT Express – after all the two companies have been linked before, writes Malory Davies.
TNT has been seen as ripe for takeover for some time, and it was only a block from the European Commission that stopped UPS snapping it up in 2012. This deal values the TNT business at £3.21 billion ($4.8bn, €4.4bn), and both FedEx and TNT Express have said they “are confident that anti-trust concerns, if any, can be addressed adequately in a timely fashion”.
The offer is expected to close in the first half of 2016. PostNL, the Dutch post office, which holds 14.7 per cent of TNT shares is supporting the deal.
Frederick W Smith, chairman and CEO of FedEx Corp, said: “We believe that this strategic acquisition will add significant value for FedEx share owners, team members and customers around the globe. This transaction allows us to quickly broaden our portfolio of international transport solutions to take advantage of market trends – especially the continuing growth of global e-commerce – and positions FedEx for greater long-term profitable growth.”
The deal will create a £1 billion parcels business in the UK making it second only to Royal Mail. In the UK, FedEx Ltd had sales of £219.4m in 2013, while FedEx Supply Chain Services had sales of £5.1m and FedEx Trade Networks had sales of £9.6m. TNT Express had UK sales in 2012 of £718.3m.
Globally, FedEx had sales of some $45.6bn (£31.2bn) in 2014 while TNT Express has sales of €6.5bn (£4.7bn) giving a combined total of £35.9bn. That would make it bigger than UPS which had a turnover of £39.1bn ($58.2bn) in 2014.
The intention is to integrate the two businesses. The brand name of TNT Express will be maintained “for an appropriate period”.
The European regional headquarters of the combined business will be at Hoofddorp near Amsterdam airport.
At the moment, this is headquarters of TNT, while FedEx is based in Brussels and has its main hub at Charles de Gaulle airport in Paris.
Liege will be maintained as a significant operation for the group going forward. In addition, TNT Express’ operations as a European air carrier will be divested to address applicable airline ownership regulations. Where permitted by regulation, FedEx intends to transition TNT Express’ intercontinental air operations to FedEx.
FedEx is based at Stansted in the UK, while its domestic parcels hub has been located at Newcastle under Lyme since 2007 when it bought ANC for £120m. TNT was formed in Australia in 1946 as Thomas Nationwide Transport. It moved into Europe in 1978 with the purchase of Inter County Express which was based at Ramsbottom in Lancashire. Its UK hub is at Atherstone, north east of Birmingham.
TNT Express’s hub in Liege will be maintained as a significant operation for the group going forward. However, TNT Express’s airline operations will be divested, in compliance with applicable airline ownership regulations.
Tex Gunning, CEO of TNT Express, said: “This offer comes at a time of important transformations within TNT Express and we were fully geared to executing our stand-alone strategy. But while we did not solicit an acquisition, we truly believe that FedEx’s proposal, both from a financial and a non-financial view, is good news for all stakeholders. Our people and customers can profit from the true global reach and expanded propositions, while with this offer our shareholders can reap benefits today that otherwise would only have been available in the longer run.”
After completion of the offer, the TNT Express supervisory board will be composed of three new members selected by FedEx (David Binks, Mark Allen, and David Cunningham who will act as chairman) and two members of the current supervisory board of TNT Express (Margot Scheltema and Shemaya Levy Chocron).
The plan is that Tex Gunning and Maarten Jan de Vries will remain on the executive board of TNT Express after settlement.
David Binks is regional president, FedEx Express, Europe.
Mark Allen is senior vice president legal international.
David Cunningham is executive vice president and COO, FedEx Express.
However, there is still scope for another bidder to come in. Under the terms of the deal FedEx and TNT Express may terminate the deal in the event a bona fide third-party makes an offer that exceeds the current offer price by at least eight per cent.”
The seven year takeover trail
It’s not the first time that FedEx has been linked with a bid for TNT. Back in 2008, shares in TNT rocketed after reports that FedEx was planning to mount a bid.
And when TNT was demerged from the Dutch Post Office in May 2011, there was speculation that TNT could be a bid target from either UPS or FedEx.
As the smallest of the big four integrators it was reckoned to be the last major acquisition opportunity.
FedEx was widely regarded as the only player other than UPS that could realistically mount a bid. Deutsche Post DHL might have the wherewithal, but would face massive competition problems with the EC.
However, shortly after the demerger in 2011, FedEx ruled out a bid, saying that TNT was too expensive. Since then it has been developing its network with a series of small acquisitions. And then in 2012, when UPS launched its bid for TNT, there was renewed speculation that FedEx would jump in with a competitive offer.
The UPS bid of €9.5 per share valued the TNT business at €5.16bn, and represented a premium of 53.7 per cent on the TNT share price (substantially higher that what FedEx is now offering). Clearly FedEx was not inclined to pay more for the business at that point and Fred Smith must have thought that the opportunity was gone.
The Commission’s decision to block the deal was certainly bad news for UPS – but arguably even worse for TNT. For most of 2012, TNT’s management was focused getting the deal done. For example, it put together a plan to sell TNT Airways. It also lost its chief executive, Marie-Christine Lombard, during the process.
At the same time the market has been getting more difficult for express carriers. A recent study by AT Kearney into the European express market found that in the three years to the end of 2013 revenue per shipment had declined despite the fact that volumes had risen.
“The CEP (courier express and parcel) market in ten European countries grew four per cent in value and five per cent in volume to reach €43.1 billion and 5.4 billion shipments in 2013. The gap between revenue and volume growth has narrowed a little compared to 2012 (when there was three per cent revenue and five per cent volume growth), but revenue per shipment (RpS) continues to decline in both segments, especially in international, which, in spite of this, continues to grow faster than its domestic counterpart.”
The impact of these factors is evident in TNT’s results. Revenue declined from €7bn in 2012 to €6.7bn in 2014 while operating income fell from €158m in 2012 to a loss of €86m in 2014. TNT has said that it recognised the protracted merger process had been a distraction for management, and now plans to make up for lost time focusing on further steps to improve profitability.
Tex Gunning, who took over as CEO following the collapse of the deal, launched a programme, Deliver!, designed to make recurring savings of €220 million by 2015 with a series of measures including consolidating services, optimising infrastructure and reducing indirect costs. The restructuring is expected to cost €150m by the end of 2015 – and some 4,000 jobs.
The plan is to focus on higher margin services and customer segments. It is targeting SMEs and single source customers, higher weight parcels and palletised freight along with international and special services products.
Earlier this year, TNT reaffirmed its strategy to expand its share of the business-to-business express market, rather than jumping into the rapidly growing home delivery sector. At the group’s Capital Markets day on 18th February, Marco van Kalleveen, managing director domestics, made it clear that TNT saw further opportunities to expand in B2B and was targeting SMEs as well as focusing on leadership in priority industries and revenue management.
Will the Commission reject this deal too?
The UPS takeover of TNT was derailed by the European Commission, which decided that the deal raised serious competition concerns and substantial remedies were needed.
In December 2012, UPS offered a number of remedies including the sale of business activities and assets in combination with granting access to air capabilities. Despite two revisions to the remedies plan, UPS could not get EU approval and finally dropped the deal in January 2013. It agreed to pay TNT a €200m termination fee.
While the Commission’s decision has opened the way for FedEx to mount an offer for TNT, it will have been only too aware of the potential for its own bid to be derailed.
Following publication of the Commission’s decision in May last year, UPS responded by claiming that the Commission had prevented €5.2bn of investment in Europe.
It highlighted the fact that the Commission’s analysis recognised that 95 per cent of the combined UPS and TNT business was not problematic.
“Additionally, there were no concerns in the countries that drive 80 per cent of European Union GDP, namely France, Spain, Germany, Italy and the UK. In the 15 countries where concerns were identified, UPS proposed significant and tangible remedies.”
When it appealed against the Commission’s decision, UPS argued that the decision was not based on an accurate assessment of the multi-product nature of customer contracts; it erroneously focused on a single product (next day cross-border shipments); ignored significant evidence from UPS and TNT about the strength and number of other competitors; and considered only a fraction of the efficiencies that would have been created following the acquisition.
When the Commission announced its decision to block the UPS -TNT deal it made specific reference to FedEx: “FedEx, for its part, has low market shares in a number of countries where it does not exercise a significant competitive constraint on UPS and TNT, because of the lack of density and scale of its European network.”
No-one at FedEx will find such a characterisation flattering, but in the current circumstances they might perhaps take some comfort from it, suggesting, as it does, that it should be able to come up with remedies to satisfy any EU competition concerns about this deal.