Reports indicate concerns remain over proposed UPS-TNT deal

Various media reports issued this week indicate that UPS will take steps to make its case to European Union (EU) antitrust regulators, regarding its planned $6.7 billion acquisition of Netherlands-based TNT NV, a provider of mail and courier services and the fourth largest global parcel operator.

A Bloomberg report stated that UPS will meet with the European Commission on November 12, with the European Commission on November 12, according to a filing by the European Commission, which cited EU Competition Commissioner as saying UPS needs to offer “substantial remedies” to eliminate concerns of the deal which would double its size in Europe.

This is the latest development regarding this deal, following multiple extensions of the Offer Period for the deal and a Statement of Objections (SO) late last month by the European Commission.

As previously reported, the SO 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.

The Bloomberg report also noted that UPS recently received antitrust objections from regulators which listed potential problems with the deal, including how buying TNT would remove one of the few serious competitors in the European delivery services market. And EU Competition Commissioner Joaquin Almunia was quoted in the Bloomberg report as saying the “preliminary view is that serious competition concerns would arise in both cases and substantial remedies are needed.”

A Wall Street Journal report pointed out that given the antitrust concerns over this deal, UPS is separately working on several possible remedies as the November 29 deadline to offer concessions gets closer. Among the concessions, according to the report, are UPS’s U.S. group shrinking its existing presence in the international parcel delivery sector of Europe, where there are the most serious objections to the deal.

Stifel Nicolaus analyst David Ross wrote in a recent 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.

UPS will work through this deal, said Jerry Hempstead, president of Hempstead Consulting, 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.”

With a penalty of $250 million should the deal not go through, Hempstead said UPS is committed to finding a way to make the deal happen.

“Now they may have to have TNT get rid of more turf than they wanted but UPS is going to keep pressing forward,” he said.”

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.