UPS Issues Public Offer on TNT

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World’s largest package delivery company, United Parcel Service, Inc. (UPS) announced a cash offer for all the issued and outstanding common shares and American depositary shares of Dutch group TNT Express for an offer price of €9.50 per share. The offer begins on June 22 and ends on August 31.

UPS has already filed for the European regulatory approval on June 15 and also received approval from the executive board and the supervisory board of TNT Express. The cash offer remains subject to the conditions mentioned in the Offer Memorandum.  On August 6, TNT Express’ board members will hold an Extraordinary General Meeting to further discuss upon the UPS’ offer.

After the initial debacle in March 2012, UPS finally confirmed that it will acquire the Dutch shipping company, TNT Express. Upon completion, this will mark the biggest acquisition in the 105-year history of UPS. Initially, the company offered an all-cash offer of €9.00 per share, which was later pushed up to €9.50 per share upon rejection of the first offer by TNT.

Should the deal go through, it would boost UPS’ footprint in Europe – particularly Britain, France, Germany and the Netherlands – consolidating its position as a global leader in the logistics industry with annual revenues of more than €45 billion ($60 billion). The transaction will further expand the company’s presence in Asia and Latin America.

TNT Express is the market leader in Europe with an 18% market share and moves 4.7 million parcels, documents, and pieces of freight every week to more than 200 countries.

UPS has already been spreading in Europe through smaller acquisitions. In February 2012, UPS announced the purchase of a Belgian e-commerce company, Kiala. In December 2011, the company acquired Italian pharma logistics provider Pieffe Group to enhance its position in North and South America, Europe and Asia.

The TNT acquisition is expected to broaden the gap between UPS, which would be enjoying around 16% market share in Europe post-acquisition, and its major rival FedEx Corporation (FDX) that has approximately 3% of market share.

The combined company will generate about 36% of revenues outside the U.S., up from the current 26%. UPS projects the transaction to be earnings accretive in the first year and to generate pre-tax cost synergies of €400–€550 million ($525-$725 million) by the end of the fourth year after completion (i.e. 2015). Further, UPS intends to deliver a return on invested capital of at least 25% by 2014, upon the successful integration of TNT.

However, the company will incur one-time pre-tax costs of a billion euros or more than a billion dollars to integrate the operations of both the companies over the next four years.  Additionally, the fruitful integration of employees and operations remains a risk to the company.

The transaction, pending various regulatory approvals, is expected to be over in the third quarter. Alternatively, UPS has to pay €200 million to TNT should the deal fail.

We, currently, have a long-term Neutral rating on UPS. For the short term (1–3 months), the stock retains a Zacks #3 Rank (Hold).

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