Deutsche Post to buy Exel for $6.8 billion

Acquisition will bring the German conglomerate closer to its goal of becoming the world's largest provider of logistics services.

By John D. Schulz, Contributing Editor -- Logistics Management, 10/1/2005

Bonn/London—Deutsche Post's (DP) buying binge continues with its pending purchase of Exel, the United Kingdom's largest contract logistics company, for approximately $6.8 billion. DP's largest international acquisition follows its purchase of Airborne Express two years ago for just over $1 billion and DHL Worldwide Express for $2.9 billion in 2002.

That's nearly $11 billion in outlays in less than four years as Deutsche Post expands globally in search of freight, customers, and profits. The DP-Exel combination will create a $67 billion giant—a prospect that is sending shock waves through the logistics, air freight, and third-party logistics (3PL) sectors.

It's all part of DP's strategic diversification, a plan to move away from its soon-to-expire German postal monopoly and to develop into a global transportation and logistics provider able to meet shippers' increasingly complex needs.

Deutsche Post will lose its monopoly on German mail delivery in two years. Currently, DP has the sole right to transport letters and catalogs weighing up to 100 grams (3.5 oz). Starting in 2006, Deutsche Post's monopoly will extend only to letters and catalogs weighing up to 50 grams. By the end of 2007, Deutsche Post's monopoly, worth approximately $15 billion annually, will completely end, and the sector will be thrown open to competition.

Analysts say that one immediate benefit of the acquisition for Deutsche Post is that Exel, considered to be the second-largest airfreight forwarder in the world, will open up new trade lanes and customers for DHL Danzas Air & Ocean, the world's largest air forwarder. To be sure, Exel will give Deutsche Post an entrée to a bevy of multinational customers, including Ford Motor Co. and Hewlett-Packard Co., in industries such as automotive and grocery, where DHL has little or no presence.

But it's far from certain that DP's acquisition will provide the margins that it is accustomed to earning from its mail business. Analysts and rival executives say that logistics is a thin-margin, high-cost business. They point to the example of UPS, which earns a profit margin of about 15 percent on its ground-package operation but only about 5 percent or so on its supply chain and logistics management business.

Operating in 135 countries, Exel is active in the grocery, health care, and auto industries. The company employs around 110,000 people and generated sales of $11.4 billion last year. Exel will also bring to DHL a worldwide footprint, millions of square feet of warehousing space, and a seasoned management team. And there will be geographic benefits stemming from Exel's significant presence in the United States and the United Kingdom. Exel generates about a third of its revenue in the United Kingdom, 30 percent in the United States, 16 percent in Asia, and the rest in Europe, the Middle East, and Africa, according to the company.

It's widely expected that the combination will allow DHL to sell "bundled" services that could rival those offered by UPS and FedEx. "This gives Deutsche Post the largest contract logistics base in the world," said Dick Armstrong, president of the consulting firm Armstrong & Associates. "The upside for customers is that they're going to get a better global combination of services. In the short term, they're going to get it on a fairly economical basis."

But exactly what the DP-Exel combination will mean for shippers will depend on how the two companies are integrated and organized in relation to each other. "Implementation will be the key," said Ted Scherck, president of The Colography Group, an Atlanta-based transportation research concern. "I could argue either side—that it will be a larger entity with a larger footprint that will be beneficial for shippers, or that it removes a major competitor from the marketplace and that it could be a negative. I'm kind of neutral from the shipper side."

As with all mergers of this magnitude, there are a lot of egos and potential personality conflicts, analysts said. They will be watching how well Deutsche Post Chief Executive Officer Klaus Zumwinkel, and his Exel counterpart, John Allan, who will lead the integration of the new logistics operation, work together. Under the terms of the deal, Allan also will get a seat on the parent Deutsche Post World Net board.

The DP-Exel marriage is indicative of larger happenings in the market place, analysts said. Increasingly, large shippers are asking for end-to-end supply chain management, and providers need to show a full menu of services merely to get in a customer's door these days.

Armstrong said consolidation in the contract-logistics market is likely to continue, leaving scant room for mid-sized competitors. "Anybody who is a mid-market generalist is probably going to get crushed," Armstrong said.

It's expected the Deutsche Post-Exel integration will take about three years, according to Zumwinkel.