Deutsche Post to buy AEI for $1.14 billion

By Peter Bradley, Toby Gooley, and James Aaron Cooke -- Logistics Management, 1/1/2000

The airfreight industry rumor mill had been working overtime since early fall. Deutsche Post, the German postal service, was said to be on the prowl for a major acquisition in North America. At the same time, there was widespread speculation that Air Express International (AEI) was on the verge of being sold. Even so, when Deutsche Post announced in mid-November that it would pay $1.14 billion for the Darien, Conn.-based international logistics firm, the deal seemed almost shockingly bold.

Deutsche Post (DP) has been voraciously acquisitive, spending more than $4 billion to buy two dozen European-based freight-forwarding, package-delivery, and logistics companies over the last two years. The company's strategy is to become the world's largest provider of global logistics and transportation services prior to its initial public offering, scheduled for October of this year. DP is well on its way toward achieving that goal: According to Chairman Dr. Klaus Zumwinkel, Deutsche Post expects to reach total sales of $29.3 billion in the year 2000.

AEI will be a big--and potentially difficult--fish for Deutsche Post to swallow. The global freight forwarder and logistics-service provider boasts 705 offices in 135 countries and employs approximately 7,700 people worldwide. It offers a broad range of integrated air, ocean, warehousing, distribution, and customs-brokerage services and is the largest user of commercial airlift in the United States. AEI has itself made several significant acquisitions recently, including Direct Cargo Line Management Services, which manages the consolidation, transportation, and delivery of retail goods in Asia for export to the United States.

Hit hard by financial crises in Asia, Latin America, and Russia, AEI had seen a 12.0-percent drop in both operating profit and net income in 1998, and its stock dropped to a low of about $14 in the first quarter of last year. By the time DP actually made its bid, AEI's stock price had risen to just over $32. That increase was largely based on the strength of merger rumors, but it also represented a response to overall strong performance by the largest publicly traded U.S. freight forwarders, according to an analysis by Edward M. Wolfe, Thomas R. Wadewitz, and Brian K. Shure of the investment firm Bear Stearns.

As a result, Deutsche Post will pay $33 per share in cash for AEI for a total of about $1.14 billion. The boards of directors of both companies already have approved the merger agreement, but the deal is subject to approval by both U.S. and European regulatory authorities.

DP plans to integrate AEI with its Danzas subsidiary, a $5.9-billion global provider of transportation, forwarding, customs brokerage, and international logistics services that employs 29,000 people in 104 countries. The new company will be called Danzas-AEI; its chief executive officer will be Renato Chiavi, currently director of Danzas' intercontinental business. Peter Wagner, now CEO of Danzas, will become chairman of the combined entity. Current AEI CEO Guenther Rohrmann will become vice-chairman of Danzas-AEI, while Chairman Hendrijk J. Hartong will take a seat on the board of the combined company.

The deal provides benefits for both parties, although Deutsche Post clearly will get the bigger boost. The merger, DP executives said, will create the world's largest airfreight forwarder. It also will strengthen Danzas' presence in trade lanes where that forwarder has been weak. Combining Danzas' extensive ocean freight organization with AEI's strength in major airfreight markets, moreover, will let Deutsche Post offer customers one-stop shopping worldwide.

"We believe the acquisition of AEI will provide substantial synergies," said Wagner in announcing the deal. "This joining of forces will position Danzas even better in the United States and therefore in trans-Atlantic and trans-Pacific business."

AEI, meanwhile, gains in size and infrastructure while acquiring a parent with very deep pockets. But it also could be a loser in some respects. In their report, the Bear Stearns analysts say they believe that as a result of the merger with Danzas, AEI will lose substantial numbers of customers, experienced personnel, and revenues--a prediction AEI executives reject. The Bear Stearns analysts also say they expect AEI's stockholders to reinvest money from selling their shares to Deutsche Post in AEI's very profitable competitors. The winners, the analysts believe, are likely to be AEI's U.S.-based competitors, including Circle, Expeditors, Eagle USA, and Fritz.

"We expect [Circle] to be the biggest winner from the merger in terms of increased freight potential. The other providers should also see a bump in volumes," they write. About $680 million in gross revenues are up for grabs, they note. Shippers can expect that AEI's competitors are not going to sit around waiting for that much business to fall into their laps and will be diligently courting customers.