Offer Period for UPS acquistion of TNT Express gets extended one more time

Following last week’s Statement of Objections from the European Commission regarding UPS’s planned $6.28 billion acquisition of Netherlands-based TNT NV, a provider of mail and courier services and the fourth largest global parcel operator, the companies announced today that The Netherlands Authority for the Financial Markets (AFM) granted an exemption to extend the Offer Period for the proposed acquisition of TNT by UPS.

UPS and TNT said that pursuant to the AFM exemption, the Offer Period is extended until one week after clearances from the European Commission and the Chinese Ministry of Commerce (MOFCOM) have been obtained but no later than February 28, 2013.  The companies said they expect the competition clearances from the European Commission and MOFCOM to be the last material ones received.

And they also said that the required competition clearances will not be obtained by the expiry of the current Offer Period, which is on November 9, while the companies still expect the deal to close early next year. UPS said it will “immediately make a public announcement” if and when the Offer Condition relating to competition clearance by the European Commission and MOFCOM is satisfied. If this announcement is made, it will include the end of the Offer Period, which will be one week after the date on which such clearances have been obtained, but not later than February 28, 2013, they said.

Last week’s Statement of Objections “addresses the competitive effects of the intended merger on the international express small package market in Europe,” and UPS and TNT said that the competitive effects will be further defined as the process continues.

While specific details of the SO were not released, UPS and TNT said that the SO is a normal step in a second phase merger and is a confidential document that sets out a provisional position of the Commission and does not prejudge the final outcome of the case.

As previously reported, the companies also said that they have been working closely with the European Commission during this process and aim to complete the transaction by early 2013. In mid-July UPS said that the European Commission’s review of the proposed acquisition was to move to a “Phase II review,” because there are facets of the deal that require more time to analyze.

That was followed by an early September announcement that the extension of the Offer Period for the deal was formally extended from August 31 to November 9 in a regulatory announcement, because “not all conditions for completion of the Offer, in particular the condition on competition clearance, were fulfilled upon the expiry of the initial Offer Period on August 31, 2012.

And a Bloomberg report published in July said that EU regulators extended their review of UPS’s bid to acquire TNT by ten working days until December 12. According to the report, the EU did not specify the reason for the delay which was signaled in an online filing on July 27. It added that the time limit for regulatory review of deals can be prolonged at the request of companies.

A report from London-based Transport Intelligence said that while UPS and TNT said that the EC objections are confidential, a “mixture of rumors and hints by the Commission imply that concerns focus on services to and between ‘peripheral’ countries in Europe, such as those in southern Europe.”

And TI also noted that while it is dangerous to rely on rumors that fact that competition issues within the major markets of Northwestern Europe appear to have not been raised suggests that the core of the merged companies would not be deemed to be a threat to competition in general. 

Stifel Nicolaus analyst David Ross wrote in a research note that the EC and UPS/TNT appear to differ on the size of the parcel market, which Stifel believes is the “main basis for objection to this merger.”

What’s more, Ross noted that the UPS/TNT combination should create the most industry concentration in a few European countries, leaving the possibility that the EC may require a divestiture of some assets in those countries to effectively sell the TNT portion to someone besides UPS for the merger to be approved, but he cautioned that is speculation, given that the EC’s interaction with TNT and UPS is confidential.

As previously reported, the joint synergies expected to result from this deal, according to UPS and TNT include:
-the complementary strengths of both organizations creating a customer-focused global platform that will be a leader in transportation technology and customer service;
-TNT Express customers benefiting from UPS’s unparalleled access to the North American market as well as access to its logistics solutions, such as global freight forwarding and distribution capabilities; and
-UPS customers will benefit from access to expanded express and road freight capabilities in Europe and broader capabilities in fast-growing regions such as Asia-Pacific and Latin America.

In an interview with LM, Jerry Hempstead, president of Hempstead Consulting in Orlando, Fla., said today’s announcement is merely a technicality.

“There are milestones in the agreement and with some of the opposition issues it’s taking a while,” he said. “For example TNT has to divest its domestic China business. Well, FedEx and DHL can’t be buyers—so then who? [Y]ou want to get the best deal you can for the spin-offs.”

While he said he does not believe the deal is in jeopardy, Hempstead said it is possible that UPS may not get all the business it set out to get, although it would get the capital for the divested pieces if the deal goes through.

UPS will work through this deal, said Hempstead, just as DHL had to struggle in a battle to acquire Airborne Express in 2003.

“UPS and FedEx waged a bitter war in Washington which cost a lot of time, management energy and money, but eventually the deal got done,” he said. “My theory is that DHL is waging a [similar] campaign with the EU to do to UPS what UPS helped do to DHL in the USA. I am sure that DHL has far more friends in the EU than UPS does. After all Deutsche Post is the German Post Office among other things. Why would the EU want to make it easy for an American firm to enter the market where a European firm is dominant and may hurt them?”

Hempstead opined that eventually UPS will buy most of TNT because if they don’t then TNT, who has now lost momentum because it are waiting for the takeover, will die or be sold to FedEx at a big discount to save the jobs. TNT is going to begin to struggle financially as they continue to stay in acquisition limbo.”

A research report from Wolfe Trahan said that TNT confirmed that it’s working with UPS management to reply to the EU’s Statement of Objections over the next couple of weeks and the company still expects the deal to close in early 2013. To this goal, the firm said TNT is currently working towards the majority sale of its airline and the sale of its domestic China business.

Reuters reported earlier this week that third quarter operating profit for TNT Express was at the low end of expectations, down 12 percent to 38 million euros ($49.1 million) on sales of 1.8 billion euros.