TNT Express (Acquired by UPS 2012)

2012

March - After years of rumours and a comparatively short offer-period, UPS had agreed to buy TNT Express for €5.16bn/US$6.77bn.

In an announcement Monday 19^th, the boards of the two companies issued a joint statement outlining the price and the conditions of the sale. The statement also included a report on the position of the dominant shareholder, PostNL, committing it "irrevocably" to the deal.

It appeared that TNT Express would continue as a separate entity for some time rather than its assets being wholly absorbed into the European divisions of UPS. The statement asserted that "all employee rights, covenants, and benefits under current ownership will be respected." This may have referred to agreements with the workforce over pensions and other benefits which were rumoured to be an important aspect of the negotiations to buy the company.

Importantly the statement also continued; "UPS undertakes to create a meaningful centre of excellence for marketing, sales, and operations in the Netherlands. UPS recognizes the significant value of TNT Express' operations, assets and people in Liège and will seek to continue the future utilisation of these operations, assets and people within the combined group."

This appeared to suggest that the headquarters of UPS in Europe would move to Amsterdam and more clearly that the Liege hub would remain in operation. The implications for existing UPS operations in Europe may have been significant.

UPS was financing the deal out of a mix of US$3bn in cash and "new debt arrangements".

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February 24th - The acquisition of TNT by UPS had thrown up what could evolve into a highly ironic situation. TNT had a wholly owned airline, TNT Airways SA, which was based at its European hub in Liege and which existed to provide TNT Express with an air freight network connecting all its locations throughout the world.

However, a change of ownership could have had serious implications for the airline. TNT Airways SA was incorporated in Belgium and qualified as a Belgian and EU carrier. That brought a number of privileges that included the company's use of Liege Airport, routings and reciprocal landing rights and trade arrangements.

As TNT itself set out in its IPO prospectus published in 2011, changes in the company's shareholder base, such that the majority of the Ordinary Shares were held by non-EU shareholders, may have resulted in TNT Airways no longer being able to benefit from its privileges. The airline might not have been able to use certain airports, including its base at Liege. TNT admited that this could affect its revenues and profitability.

The situation called to mind a very similar problem faced by DHL in the US. Due to airline ownership legislation, it was forced to sell a controlling stake in DHL Airways to a US corporation in 2003. However UPS and FedEx both challenged the ownership status saying that as the majority of work undertaken by the airline was for its largest customer, DHL, it was de facto, owned by a foreign enterprise. This argument was eventually thrown out by the US judicial system and the Department of Transportation.

Should the acquisition of TNT by UPS go ahead, TNT Airways might well have been spun off to conform to EU legislation. However, there might have been a case that the same issue existed over 'control' and 'ownership'. If DHL's management had long memories, they might well have wished to test this issue in court.

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February 17th - The senior management of UPS has spent several years denying it's interested in buying TNT Express. "There are two strategies to climb the mountain: DHL selected the fast way, but when it reached the summit it was exhausted and vulnerable" said Kurt Kuhn, UPS' Chief Financial Officer in 2010 when asked if he was interested in buying TNT. UPS, therefore, was not going to make a big acquisition.

It appears things have changed somewhat. On Friday, UPS put in an offer to buy the Netherlands-based express company. The bid- which the board of TNT Express has rejected – is at €9 a share, valuing TNT at €4.8bn ($6.4bn).

Such a purchase does make sense for UPS. TNT is the last of the smaller express operators with a global business. Certainly there are interesting express businesses such as Toll or some of the Japanese companies, but they lack breadth in their market exposure. Buying TNT would reduce the structure of the global express market to just the 'Big Three' of UPS, FedEx and DHL, removing the opportunity for any new entrant who would like to make the jump from being a regional to a global player.

It would also raise the prospect of UPS establishing a road freight business in South East Asia and southern China, something which it has tried to do in the past. TNT is also the largest cross-border express road freight carrier in Europe, so the combination of the two companies would enhance the prospect of UPS becoming a leading road freight company on a global basis.

The economics for UPS are also attractive. TNT's air-express operations would be straight-forward to integrate into the UPS network and would probably offer synergies, whereas buyers other than FedEx or DHL would continue to struggle with a sub-scale business. This is a potential barrier for any rival bidder, such as a smaller company or a financial institution.

Buying TNT would also enable UPS to boost its European business and be able to increase asset utilisation through its network. It would be uncertain how UPS would rationalise its existing infrastructure, although this surely would have to be done if the purchase were successful.

So the incentives for UPS are considerable. In addition, apart from the attraction of beating FedEx and 'driving tanks on the lawn' of DHL, UPS has internal reasons for trying to buy TNT. UPS has recently been generating more cash than it knows how to invest, leading it to embark on a share buy-back programme. This is rarely an attractive long-term option for any management, suggesting a lack of ambition and the €4.8bn offer is unlikely to stress the company's finances greatly, however the ratings agency Standard & Poor's commented that such a purchase could undermine UPS' high AA- credit rating.

The price of €9 a share is not huge, yet it represents a substantial premium of the closing price of TNT. It must be attractive to many investors, bearing in-mind its troubles since the de-merger from PostNL; although the latter is still a major shareholder in the TNT Group and its influence could delay or prevent a purchase.

The relatively low price may also act to motivate rival bidders, Of course just like UPS, FedEx has recently rejected the idea with Allan Graf, the CFO of FedEx describing TNT as "too expensive" in March of 2011, so FedEx may already be preparing its own offer.

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TNT Express provides on-demand door-to-door express delivery services for customers sending documents, parcels and freight. It offers national, regional and global express delivery services, mainly for business-to-business customers. 

In 2010, TNT decided to separate its divisions into two separate companies: Mail and Express. The separation took place through the demerger of the Express activities by TNT NV. TNT retained a 29.9% minority financial shareholding in TNT Express.

In 2011 its revenues were €7.25bn.