UPS love letter validates TNT’s earlier break-up

February 20, 2012

By Quentin Webb

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

UPS’s 4.9 billion euro ($6.4 billion) love letter validates TNT Express’s recent divorce. The U.S. parcel service has admired its smaller Dutch peer for years, and proposed just before Valentine’s Day. TNT is thinking about it. But clearly its 2011 split from PostNL, the dowdy domestic mail business, is finally achieving the desired effect.

While traditional postal services struggle with email and upstart competitors, the express industry – rapid international deliveries, courier services, and parcels – has fared better. But the sector still cries out for consolidation, because zipping packages worldwide is a scale game. Hence last year’s TNT-PostNL separation, under pressure from activist investors.The newly single TNT made a clear bid target: sizeable in Europe, but globally lagging UPS, FedEx, and Deutsche Post’s DHL, and struggling to make money in Brazil and China.

UPS’s 9 euros-a-share all-cash bid may look first class, pitched at an outsize 43 percent premium to TNT’s previous close. It values TNT at 10.4 times the 470 million euros in EBITDA that Nomura estimates it will make in 2012. UPS trades at 9.8 times current-year EBITDA and FedEx at just 6.1 times, Starmine data shows.

But TNT is right to drag its feet. The offer is still a 5 percent discount to the shares’ first close post the demerger. Investors weary with the weak performance of TNT shares since the separation will not be easily appeased.

Big synergies, based partly on combining ground and air fleets, could justify UPS going higher. Barclays Capital reckons it could reap $451 million in annual gains if it gets TNT’s margins up to its own. Taxed and capitalised, these are worth perhaps $3.4 billion – against the $1.9 billion premium currently on offer. But disposals to appease antitrust regulators may pare back the value creation to something less stratospheric: on BarCap’s figures, UPS already has 23 percent of Europe’s international express market, and TNT 16 percent.

UPS is probably reluctant to launch a hostile bid. This would be a transformational deal and the company has never done anything big in Europe before; it needs to keep TNT management on side. But TNT really needs to get an auction going to force UPS to pay up. Antitrust concerns make DHL a non-starter as a counterbidder – but not FedEx. UPS’s home rival is more highly geared, and would enjoy fewer synergies. Still, FedEx also risks being marginalised in Europe, and even a failed intervention could compel UPS to raise. This courtship is going somewhere.

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