What Does the Breakup Mean for Logistics?

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In the face of seemingly insurmountable regulatory hurdles and mounting frustrations among its investors, Atlanta-based United Parcel Service (NYSE: UPS) has walked away from its proposed buyout of Hoofddorp, Netherlands-based logistics firm TNT Express (AMSTERDAM: TNTE). Valued at nearly $7 billion, the proposed deal would have provided UPS with a foothold in Europe as well as certain emerging markets and helped TNT compete with far larger rival DHL. The deal leaves both companies at a crossroads and may spell trouble for TNT in the face of intensifying competition from its Deutsche Post-owned rival.
Under the proposed terms of the deal, UPS would have purchased TNT for 9.50 euros per share in cash. The combined company would have earned approximately $60 billion per year and claimed at least 20 percent of the European freight market. As a condition of the deal's disintegration, UPS must pay TNT a one-time breakup fee of 200 million euros.

Stock Price Since Breakup
Since news of the breakup hit the wires on January 14, UPS's stock has enjoyed modest gains. It now sits at $79.66 per share. This represents a 2.2 percent premium over its closing price on the final day before the announcement of the deal's failure.

However, the stock had enjoyed a healthy run-up as anticipation for the breakup built. In late December, it became all but clear that the deal would not go through without either significant concessions on UPS's part or a wholesale change in E.U. regulators' attitudes. Since its December 28, 2012 interim low, the company's stock has gained about 9.3 percent.

By contrast, TNT has seen its share price collapse over the same period. From its January 10 closing price of 8.50 euros, the company's stock lost about 43 percent in two trading days. It settled near 5 euros per share and has since rebounded slightly. To be fair, TNT traded between 5 and 7 euros per share for much of the six-month period that preceded the February 2012 merger announcement. In fact, most investors have long viewed the company as a speculative takeover play. UPS's interest validated this view and led to its above-market valuation.

Businesses Involved
UPS is the largest American shipping company. Its core business remains U.S. shipping and freight. Although it has recently expanded its operations in certain overseas markets, it has largely ceded dominance of the international supply chain to FedEx. However, UPS engages in a number of supply-chain management activities and provides logistical solutions to a range of large North American businesses. The company employs over 220,000 people and earned $3.3 billion on $53.7 billion in gross revenues in 2011.

TNT is a major European logistics and transportation conglomerate that has steadily lost market share to Deutsche Post (Xetra: DPW.DE) subsidiary DHL in recent years. In addition to its airline properties, the company operates an air cargo subsidiary and lays claim to somewhat less than 10 percent of the European ground-freight market. TNT also operates in several key international markets and provides a significant revenue stream for PostNL. The Dutch postal service currently owns about 30 percent of the company.

Although the failed merger is a clear setback for UPS's expansion plans, TNT walks away from the fiasco in a far weaker position. The company had offered to sell its wholly-owned airline subsidiary to ASL Airlines Corporation in order to make the deal more palatable to European regulators. At issue was a European Union law that prohibits non-E.U. companies from claiming majority ownership of E.U.-based airlines. In order to raise capital in the wake of the deal's breakup, it may choose to proceed with the sale of the airline.

Even if TNT retains ownership of its airline holdings, its position remains precarious. Although it is still an attractive takeover target, potential suitors remain elusive. If European regulators were keen to scuttle the UPS-TNT deal due to the perceived European duopoly that DHL and UPS would subsequently enjoy, they will certainly be unwilling to bless a potential DHL-TNT merger.

FedEx (NYSE: FDX) might appear to be a natural suitor. The Memphis-based logistics company has a tiny European presence and would not present such a serious threat to DHL's Continental dominance. However, the company has little need for TNT's emerging-market portfolio. FedEx is already one of the largest international shipping companies and has made a number of strategic moves designed to expand its presence in fast-growing areas of the world. Since a theoretical FedEx-TNT deal would merely afford the American shipper a medium-sized foothold in a relatively stagnant market, it would probably be redundant.

As investors think about how to position themselves in the wake of this deal's breakup, it is important to note that TNT's largest single stakeholder is the Dutch national postal service. Immediately after news of the breakup was announced, PostNL reiterated its commitment to finding a buyer for TNT. In the coming months, it appears likely that new suitors will step forward to snap up TNT in its weakened state. Keen investors would do well do watch TNT's stock at these levels.

mthiessen has no position in any stocks mentioned. The Motley Fool recommends FedEx and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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