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Logistics & Supply Chain

Getting aggressive

Alexandra LeonardsBy Alexandra Leonards1st May 20065 Mins Read
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Interest has again been reignited in the future of Dutch express, mail and logistics company TNT following comments by UPS’ CFO, Scott Davis. At a conference call to discuss the company’s first quarter results, he hinted that UPS could be about to embark on a more aggressive acquisition strategy. At the top of its shopping list would be international freight forwarding and package delivery companies. Contract logistics companies could also be in its sights, and this had the effect of fuelling speculation that TNT was a possible target.

Moreover, the chances of TNT being acquired were greatly enhanced following a judgement by the European Court of Justice. It ruled that the ‘Golden Share’ which the Dutch government holds in TNT was illegal. The move is seen as significant in the European Commission’s wider efforts to prevent protectionism of key national companies by individual European states.

The so-called ‘Golden Share’ allows the Dutch government to block any fundamental changes to the company structure. The European Commission took the Netherlands to the European Court of Justice (ECJ) in December 2003 over this provision, alleging it infringed the free movement of capital within the EU.

Even though the majority of the company is now in private hands, the Court found that the provision could make it more difficult for other companies to acquire a shareholding in TNT and that the arrangement was liable to deter investors from other member states from making such investments.

Although a response is yet to be forthcoming from either the Dutch government or TNT, the ruling could eventually open the door for an acquisition of the Express, Mail and Logistics group.

In the UK, retailer WH Smith announced that it was to float its giant news distribution division in an attempt to focus its business on high street sales. WH Smith’s management suggested that the new independent operation will be able to work more effectively with other retailers, free from its links to a key retail competitor. It would also be better placed to maximize its technological investments, win new business and, most importantly, develop new revenue streams.

This decision to demerge and float on the UK stock exchange will result in the creation of a logistics operation with a 2005 turnover of e1,733m and profits of e54m. WH Smith’s news distribution division has around a 33 per cent share of the market, although the sector is very static. For this reason the management of the newly independent operation would undoubtedly be looking to other sectors in which to expand. With the scale of the operation – 52 distribution facilities throughout the UK – it would be well placed to do so. There may even be opportunities for acquisitions across Europe should the management be ambitious enough.

Although its management has as its prime goal the flotation of the company, it may prove attractive to trade buyers or private equity companies. The business has already been linked with DHL due to interest which the German express company reportedly showed when WH Smith previously considered selling the division to a private equity company in 2001. However comments from Klaus Zumwinkel concerning Deutsche Post’s acquisition strategy would seem to rule it out of the running.

High performance
Also during the period German rail and logistics provider Deutsche Bahn (DB) released its financial figures for 2005 showing the best performance in its history. Traffic, revenues and earnings were all strongly up. Group revenues increased by 4.6 per cent (4.9 per cent on a like for like basis) to e25.1 billion, and operating profit grew to e448m, 12 per cent above initial forecasts.

One of the most important consequences of the good performance,according to the management of DB, is that it should help smooth the way for an eventual flotation on the stock market. This follows improvements to its balancesheet ratios, ROCE and gearing.

Finally, DHL entered into a political storm following reports that it is to be awarded a massive e1.2 billion deal in conjunction with US company, Novation, to manage the UK’s National Health Service (NHS) consumables supply chain. The deal will see it, through recently acquired subsidiary Exel, undertake the distribution of a vast array of products, such as syringes, dressings, disposable gloves etc to hospitals ands clinics throughout the UK. DHL/Novation was selected ahead of a consortium comprising Gist (logistics subsidiary of British industrials conglomerate BOC) and IBM.

However the deal ran into controversy on two fronts. Firstly, the US company Novation is under investigation by a US senate committee into alleged anti-competitive behaviour. There have been complaints from smaller competitors that they are being forced out of the market and that Novation charges Medicare more than hospitals are spending. The company refutes these allegations.

Secondly, some political opponents to the government are opposed to what they term as a ‘sell off’. They believe that it is unnecessary to out-source logistics in the NHS given that the Logistics Authority was already operating efficiently. They believe this has been demonstrated by the fact it returned e4.4m to the NHS in 2005. The Logistics Authority makes around 1,200 deliveries a day to 600 hospitals and clinics from six depots around the country. Its turnover in 2005 was e1.1 billion.

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Alexandra Leonards

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