The Exploding Mess at TNT Express
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It has been the exact opposite of a dynamite year for TNT Express (NASDAQOTH: TNTEY).
Shares of Europe’s second-largest (and the world’s fourth-largest) package delivery company fell 50% the day UPS (NYSE: UPS) announced that it would withdraw its $7 billion bid to purchase the company. European Union antitrust regulators indicated to UPS management that they would veto the proposed acquisition (which they officially did a few days later).
This latest problem is just the punctuation mark to a bad end of 2012 for the company. September of last year saw the company’s CEO suddenly quit, taking a job at a French logistics company while the eventually blocked acquisition was still pending. That departure left the company high and dry, with no leadership during important transitional period for its business and its shareholders. TNT's now suing the previous CEO for breach of contract.
With more than a month since the blow-up, and a new permanent CEO at the helm, it's time to look at how TNT might clean-up the mess that EU regulators and the previous CEO created for the company and investors.
Engineering a Turnaround
With the uncertainty of the proposal now behind it, management can now focus entirely on its future as a stand-alone company. Thinking they would soon be acquired by UPS, TNT did little to improve its position during most of the merger process. As a result, the company still faces the exact same problems it faced before the acquisition was announced: a challenging European market, difficulties with its emerging-market operations, and costs across that company that require cutting.
Retrieving its pre-merger "2012 Turnaround Playbook" from storage, TNT Express recently announced plans it had intended to implement the previous year. They include include cutting jobs across Europe and divesting itself of its small Chinese business and unprofitable Brazilian operations.
Investors likely welcomed the news that the company would be getting out of China, as its Chinese operations were always too small to ever truly compete in the country. The Brazilian divestiture is another matter. Although Brazil is not profitable for the company, it was an important market for future growth, in which the company already had about 20% of the country’s market share.
However, since both China and Brazil have always been profit-drainers, rather than profit-generators, both divestitures (and the European job cuts) will go a long way to help shoring up the company’s balance sheet.
FedEx to the Rescue?
TNT’s management certainly does not anticipate any offers from Europe’s No. 1 package delivery company, Deutsche Post (owners of DHL). An acquisition by Deutsche Post would face the exact same regulatory hurdles that blew up the UPS deal.
All is not lost on the acquisition front, however. There are some indications that EU regulators would not be entirely opposed to the idea of FedEx (NYSE: FDX) swooping in to save the day. Although FedEx’s European business is quickly growing, it is still comparatively tiny against that of Deutsche Post, TNT Express, and UPS.
This does not mean a FedEx deal is in anyway likely. Although it has the balance sheet and access to cheap debt to make such a deal possible, FedEx (at least publicly) seems content with its European plans of gradual organic expansion and the occasional small acquisitions. But with TNT investors sending shares near new lows, TNT divesting itself of unprofitable businesses abroad, and the likelihood that nobody else could make a counterbid for TNT Express (which would help to keep the asking price relatively low), it would at least be prudent for FedEx management to consider the possibility.
At today’s share price, and with the craziness of the last year still in investors' minds, this could be a very opportunistic target for FedEx, and the coup they need to instantly make themselves a major player in Europe.
Uncertain Future and a Uncertain Turnaround
Without a doubt, the company faces a tough road ahead. While current investors would obviously like an easy way out via an acquisition, there are no guarantees that FedEx or EU regulators will oblige them. The only real path forward for management and shareholders is to just assume that any deal will not be possible. Management has the blueprint for a go-it-alone company turnaround. Only time will tell whether they can execute on those plans.
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