UPS Packages a European Deal
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In its entire 105-year history, perhaps United Parcel Service's (NYSE: UPS) boldest move ever is the recent $6.4 billion (9 euros per share) bid launched for its European rival TNT Express. The deal would make UPS the biggest express mail carrier in Europe and could generate about $450 million in synergies thanks to some overlap in their networks.
TNT Express is the smallest of the big four global package delivery companies. The company has a presence in 62 countries, has 16 road hubs in Europe, employs 83,000 people and has a fleet of more than 30,000 vehicles and 60 airplanes.
UPS is a company that is not known for such bold moves, but rather for a "slow and steady wins the race" type of corporate culture. Even in the executive office, it is not prone to rash moves as over its entire history UPS has had only 10 chief executives. In fact, UPS did not even go public until 1999. So this foray into Europe is definitely worth closer scrutiny from investors.
It may come as a surprise to some, but even staid UPS has bought about 30 companies around the globe since 1999 with the largest acquisition being the $1.3 billion purchase of Overnite in 2005. But now finally, UPS is putting its full financial muscle into a deal.
The bid for TNT Express comes at a crucial time for UPS and its rivals such as FedEx (NYSE: FDX). These companies are in a period of moderate but uneven growth (matching the global economy) and are moving to build out their global delivery networks in order to tap into international trade flows. Most deals to date though have been rather small as these companies simply filled in specific service and geographic gaps in their systems.
One can understand the reason for caution among these companies. Look at the last major deal in the package delivery sector – the 2003 takeover of Airborne Express in 2003 by Europe's Deutche Post DHL. Technological glitches led to late deliveries, billing errors and lost customers causing DHL to eventually pull back from the U.S.
However, the deal for TNT should have come as no real shock to investors familiar with UPS. Company insiders are saying that TNT's express business has long been attractive to UPS. According to Doug Caldwell of AFMS Logistics Management Group, the reason for the interest is that TNT has a strong relationship with European multinationals, a valuable long-haul road network and an outsourced operating model that gives it a very flexible cost base.
Another attraction for UPS is that TNT has a sizable presence in two of the BRIC countries – China and Brazil. UPS already has a growing business in China, but it has ambitions on establishing a major presence in Latin America.
But will UPS eventually succeed in its bid, which has already been rejected by TNT?
The main stumbling block could be UPS' main rival, FedEx. It has long been a laggard in the European market ever since it closed its Brussels hub in the early 1990s. The company closed the hub because it got tired of losing money on its European operations. Its generates only 2% of its revenues inside Europe versus 14% for UPS.
So TNT Express may be too enticing to FedEx management as a great way to re-enter Europe in a big way and a bidding war could erupt. It would be a tough fight, but the winner should eventually be UPS as its market capitalization is more than double FedEx's and it generates more free cash flow than its rival. In other words, it has more financial firepower than FedEx.
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