Proposed FedEx acquisition of TNT faces potential European Commission roadblock

The current status of FedEx’ planned acquisition of Netherlands-based TNT-NV and a provider of mail and courier services and the fourth largest global parcel operator for $4.8 billion, which was initially announced in April, remains in flux, with continued actions being taken by the European Commission.

Last week, the European Commission kicked off an investigation to assess if the proposed acquisition “is in line with the EU Merger Regulation,” adding that there are concerns in regards to various European markets for both international express and deferred small package deliveries, with the merged company facing insufficient competitive constraints from UPS and DHL, the other two large remaining players in that space. And it added that such a scenario could lead to higher prices for both businesses and consumers. The European Commission said it has 90 working days, until December 7, to “investigate the proposed acquisition and to determine whether these initial concerns are founded.”

This is not the first time TNT has been featured in a deal with the prominent global parcel payer. In 2012, it was close to being acquired by FedEx’ chief rival, UPS for $6.8 billion, but the deal was squashed, following a formal decision from the European Commission, the executive body of the European Union, which prohibited the acquisition. Many of the EC’s concerns over the deal were due to the competitive parcel landscape in Europe.

The deal is expected to be made official during the first half of 2016, with FedEx agreeing to pay TNT $200 million in the form of a breakup fee should the deal not come to fruition. TNT and FedEx said that the European regional headquarters of the combined companies will be in Amsterdam/Hoofddorp, and that the TNT Express hub in Liege will be maintained as a significant operation of the group.

As for any antitrust issues that may arise from this deal, FedEx and TNT said that these concerns can be addressed in an adequate and timely manner.

TNT has grown into a highly respected $6.680 billion euro company with diverse revenue streams from around the world with operations in more than 200 countries in Europe, the Middle East, Asia Pacific and Latin America. The company has a substantial group of assets, including aircraft, vehicles, hubs, and depots, which cumulatively account for about 1 million deliveries per day handled by its nearly 80,000 employees. In 2014, it kicked off new productivity and efficiency plans, which included a restructuring of its management team and investments into its people, processes, IT systems and institutional competencies, whilst facing stiff competition and adverse trading conditions, particularly in Western Europe TNT CEO Tex Gunning said on the company’s fourth quarter 2014 earnings call.

Rob Martinez, president & CEO, Shipware Systems Corp, a San Diego-based parcel consultancy, said this deal is good for TNT, whose financial volatility on its own is in question.

“It is good for FedEx, and it’s good for EU shippers,” he said. “It actually makes the market more competitive in our view.”

In April, Martinez told LM that the acquisition of TNT Express by FedEx makes strategic sense for FedEx to immediately grow its European capabilities, distribution footprint and market share.

“While FedEx already operates a sizeable air fleet in Europe, TNT now gives FedEx an expansive Ground network throughout the continent, especially within France and the UK where FedEx does not have a strong road network,” he said. “Conversely, it’s a good move for TNT to expand global capabilities to its customer base, especially in North America. With this acquisition, FedEx will immediately become the second largest operator with a combined 17% of the European market share. DHL has an estimated 19% market share, UPS about 16%. Unlike the failed acquisition of TNT by UPS in 2012, EU regulators are less likely to object since FedEx has less presence in Europe, less than 5 percent of the market share prior to today’s announcement.”

A New York Times report said that FedEx, which has been operating in Europe for about 30 years, had about 210 million shipments into and out of Europe last year and provides next-day service to about 86 percent of the market, but is well behind DHL and UPS in Europe.

Jerry Hempstead, president of Orlando, Fla.-based Hempstead Consulting, said that the political reach of DHL in Europe cannot be underestimated when examining this deal.

“This shoe dropped at the last minute and now extends out the time a deal might get done,” he explained. “DHL is so formidable in these circles that the possibility exists that the deal might eventually be nixed or have so many caveats it’s not worth doing. I’m sure there is great jubilation in Germany about this announcement. Sadly this will not be the best thing for European shippers or the employees of TNT. TNT is again struggling financially. They had a temporary life ring tossed to them by UPS when that deal was nixed. UPS had to make a huge payment to TNT.
But with all the uncertainty fear and doubt during the merger talks they lost market share and momentum. Now it’s happening to them again. If this deal fails TNT is going to have a heck of a time making a go of it long term. It’s really quizzical that the EU is doing this because FedEx has such a small share of the pie in Europe. My hope is that the Commission will eventually approve but the strong tentacles of DHL may again squeeze the life out of this.”

In April, FedEx and TNT cited various strategic benefits of this deal, including:
-the combined companies being a strong global competitor in the transportation and logistics industry, drawing on the considerable and complementary strengths of each other;
-the combined companies’ customers would enjoy access to a considerably enhanced, integrated global network, which would benefit from the combined strength of TNT Express strong European road platform and Liege hub and FedEx’s strength in other regions globally, including North America and Asia. TNT Express customers would also benefit from access to the FedEx portfolio of solutions, including global air express, freight forwarding, contract logistics and surface transportation capabilities; and
-FedEx will strengthen TNT Express with investment capacity, sector expertise and global scope, among others

As part of the conditions of the deal, TNT Express’ airline operations will be divested in compliance with applicable airline ownership regulations.

A Wall Street Journal report published in April explained that this deal makes sense on multiple reasons, given that the European delivery market is making steady gains due to continued expansion following the rollout of a single currency, and the ongoing proliferation of e-commerce, coupled with Europe being a hard market for foreign entities to get into, as many people live in inaccessible apartment buildings and each nation has its own rules and competitors.

And Dave Bronczek, FedEx Express president and CEO, said in the report that this deal can augment how FedEx operates in Europe, with TNT’s vast footrprint there, as well as FedEx hoping to leverage the increasing global reach of e-commerce.