UPS reaches agreement to acquire TNT’s Express business

In what can potentially be viewed as a significant game changer for the global logistics and express delivery sectors, UPS and Netherlands-based TNT NV, a provider of mail and courier services and the fourth largest global parcel operator, said today they have reached an agreement in which UPS will acquire TNT Express for roughly $6.77 billion ($5.16 billion euro). The agreement is an all-cash offer of $9.50 per ordinary share for TNT Express.

UPS and TNT officials said this agreement was reached on Thursday, March 15, a day before it said it remained “in constructive discussions” with TNT regarding a potential acquisition to acquire the entire issued share capital of TNT Express. They added that the Executive and Supervisory Boards of TNT Express “unanimously intend to support and recommend the offer.” This deal is subject to certain conditions, regulatory clearances and approvals and is expected to be completed by the third quarter.

If this deal comes to fruition, as expected, it completes nearly two months of ebbs and flows in getting to this point.

In February, UPS made an unsolicited bid of $6.43 billion ($4.89 billion euros), which was roughly 40 percent above TNT’s stock price. The offer was turned down by TNT although the company said they were in discussions.

A March 6 Wall Street Journal report stated that talks between UPS and TNT had slowed down, but it cited people familiar with the matter as saying there is a hope a deal will be reached although talks are likely to take multiple weeks. And it added that UPS and TNT disagree on personnel issues and whether TNT’s headquarters would continue to serve as the base for the combined business.

In December 2010, TNT announced its plans to it plans to “demerge” operations by separating its Express and Mail operations into two independent companies, effective January 2011. Company officials said that the main reasons for an internal separation were the increasingly divergent strategic profiles of the two units and the limited existing synergies between them. Soon after this occurred, UPS said it did not intend to make any large acquisitions in the future, instead indicating it may be more inclined to focus on small and medium-sized acquisitions in Europe rather than buying TNT’s Express unit.

But that sentiment changed in recent months, leading to today’s development.

“We intend to leverage the strengths of both companies to enhance the combined growth portfolio and believe all stakeholders will benefit,” said UPS Chairman and CEO Scott Davis on an investor call today. “UPS possesses a large U.S. presence, as well as experience in global supply chain management. TNT Express provides additional small package access points in Europe, the most extensive European express road network, and an expanding presence in emerging markets.”

Davis said this combined entity will provide an expanded geographic reach with a broader service offering for its combined customers. And he stressed that both organizations have a strong cultural fit, with strong focuses on customer service, and operational excellence.

In explaining the thinking behind this deal, Davis explained that UPS felt it was the right time to make this move, with the demerger of TNT Express from its parent company, Post NL, allowing for a pure play acquisition. And with strategic infrastructure investments in the UPS U.S. network recently completed, including its Louisville, Ky.-based WorldPort facility,  and global fcilities in Shenzen, and Cologne, coupled with UPS having the youngest air fleet in the industry, has positioned the company for growth.

UPS, said Davis, believes TNT Express is well aligned with three main strategic company themes:
1-invest to grow, with TNT expanding the product portfolio through its European road freight operations;
2-transforming and broadening UPS’s global footprint with the world in companies such as Brazil and Australia; and
3-creating value through UPS’s service offerings and allowing small- and medium-sized businesses to have better access to global markets and increase exports.

UPS CFO Kurt Kuehn said on the call that UPS has been committed to Europe since 1976 and explained that the UPS-TNT combination is a continuation to its longstanding commitment to Europe. UPS currently serves about 60 countries and territories across Europe.

“We continue to see Europe and the entire continent as an attractive area for future growth and therefore seek to invest to build out our service offerings there, especially in areas like express road freight, additional access points, network density, and expanded supply chain solutions in sectors like high-tech and healthcare,” said Kuehn.

Over the years, TNT has grown into a highly respected $7.25 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, said Kuehn. And he added TNT 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 77,000 employees. IN 2011, TNT had a net loss of $270 million euro and $7.2 billion euro in revenue.

And according to UPS estimates about 23 percent of TNT Express’s Europe revenues are from its express road freight operations, which Kuehn described as an important and vital part of its business and a real differentiator.

“We see this combination of UPS and TNT as a natural evolution of UPS’s strategy, with this acquisition fitting with our focus strategy,” he said. “Europe is one of UPS’s growth engines, and we see great opportunities in Europe and are committed to investing there. Europe benefits from high export and cross-border volumes with its proportion of exports exceeding that of the U.S., and we think continued growth of strong European exports will provide UPS with great opportunities across multiple revenue streams.”

UPS is also committed to developing improved small package capabilities across intra-Europe trade as the European community becomes more effective trading within itself and cross-border trading grows at a greater rate. And the expansion of cross-border trade, said Kuehn, is expected to result in a natural alignment for UPS’s distribution business, creating even stronger European exports as customers realign supply chains.

This is where TNT helps “fill in the gaps” for UPS, where it does not have strong geographic presences, said Kuehn. And over time bringing TNT Express into the fold will increase UPS’s non-U.S. revenues from 26 percent to 36 percent, as 99 percent of TNT’s revenue comes from outside the U.S., while providing TNT customers with increased access to the global marketplace.

Kuehn said the complete integration of TNT Express into UPS is expected to take about 4 years. In terms of synergies, he said UPS expects to have an annual run rate at the end of the 4-year integration of between $400 million-to-$550 million euros, noting that the combination of UPS and TNT assets and infrastructure aligned, coupled with increased densities, will result in a more efficient network. And UPS will invest about $1.3 billion euros in this process over the 4-year period, with this capital going towards network optimization, and modifying and expanding facilities, and a significant investment in customer-facing IT and operational IT systems.  

Given the size of the investments and related challenges, Kuehn said that UPS will be establishing and integration team with significant transportation and logistics experience, which will be staffed by UPS and TNT executives. The cornerstone of the integration process will focus on customer service and quality remaining at current levels.

“This will not be one size fits all; it is a unique country-by-country integration plan, depending on existing capabilities at each company,” said Kuehn. “This will be a phased, deliberate approach…with customer alignment first, getting the portfolios and customer experience first, followed by operational integration. This will ensure a smooth and profitable transition.”

The three main areas of synergies between UPS and TNT, as outlined by Kuehn, are: country operations where there are benefits of increased density to drive more efficiency and local hub and feed operations; the air network in which the companies are combining global networks while reducing expenses and improving utilization; and better utilization in global ground handling operations. Other significant savings are expected in the general and administrative areas on the procurement side and for key support functions.

A majority of the integration will be completed by the end of the fourth year, with customer-facing integration followed by operational synergies, which will be primarily realized in years 3 and 4.

Kuehn said UPS is also committed to maintaining an ongoing dialogue with its works councils, trade unions and other employee representative bodies during the extended integration process.

Jerry Hempstead, principal of Hempstead Consulting, told LM that aside from dropping the number of global express players down to three—UPS/TNT, DHL, and FedEx—it also puts DHL and FedEx at a tremendous disadvantage in the U.S. and Europe, respectively.

“The deal makes UPS the largest carrier by far in Europe and makes FedEx the weak sister in that turf,” he said. “FedEx had less than 10 percent of the European market and the size and critical mass of TNT/UPS and that of DHL will make it almost impossible for FedEx to have a critical mass to allow it to have low enough operating cost to be a significant player.”

What will now fix the deficiency of FedEx in Europe and the DHL lack of a domestic solution in the USA is some sort of marriage of FedEx and DHL, he opined.

“So just like there is a duopoly herein the U.S., we may a global duopoly emerge. This is a great deal for UPS. I have every faith and confidence in UPS to marry the two companies successfully and the result will be improved service and lower operating costs. UPS is methodical in their approach, they are also highly engineered and have the cash to do the marriage correctly so that customer service will not be affected. The world keeps getting smaller and flatter and UPS is speeding up the process of change with this acquisition.”

Armstrong & Associates Chairman Dick Armstrong added that TNT has continued to be a dominant European player and has made some additional expansions in Asia that are mostly complimentary to UPS operations. 

“UPS will be paying a multiple of about 11.5 times EBITDA which is high,” he said. “However, this is an only game in town situation for UPS to expand its global competition against DHL. It’s a good move for UPS.  They have the bucks and the scale to support it. DHL, in the meantime, has made significant changes in freight forwarding top management, a very profitable business line.  To this observer, it looks like the wrong move at the wrong time.”