United Parcel Service (UPS) will finally acquire TNT Express, a Dutch shipping company, following the initial rejection of the bid by the latter. This will be the biggest acquisition this year and the largest for United Parcel in its history, if completed successfully.
United Parcel made an all-cash offer of EUR9.50 per share, or EUR5.16 billion ($6.77 billion) in total. This was up EUR0.50 per share from the offer made in February by United Parcel. The company intends to utilize $3 billion from the existing cash balance and the rest from new debt arrangements to pay for the offer.
The deal would boost United Parcel’s footprint in Europe, in particular Britain, France, Germany and the Netherlands, making it the global leader in the logistics industry with annual revenues of more than EUR45 billion ($60 billion). The transaction will further expand the company’s presence in Asia and Latin America.
TNT Express is the market leader in Europe with an 18% market share and moves 4.7 million parcels, documents, and pieces of freight every week to more than 200 countries.
United Parcel, the world’s largest package delivery company, is already spreading in Europe through smaller acquisitions. In December last year, the company acquired Italian pharma logistics provider Pieffe Group to enhance its position in North and South America, Europe and Asia. In February this year, United Parcel announced the purchase of a Belgian e-commerce company, Kiala.
The TNT acquisition is expected to broaden the gap between United Parcel, which would be enjoying around 16% market share in Europe post-acquisition, and its major rival FedEx Corporation (FDX) that has only 3% of market share.
The combined company will generate about 36% of revenues outside the U.S., up from the current 26%. United Parcel projects the transaction to be earnings accretive in the first year and to generate pre-tax cost synergies of EUR400-EUR550 million ($525-$725 million) by the end of the fourth year after completion (i.e. 2015). Further, United Parcel will deliver return on invested capital of at least 25% by 2014, as expected, upon the successful integration of TNT.
However, the company will incur one-time pre-tax costs of a billion euro or more than a billion dollars to integrate the operations of both the companies over the next four years. Additionally, the fruitful integration of employees and operations remains a risk to the company.
The transaction, pending various regulatory approvals, is expected to be over in the third quarter. Alternatively, United Parcel has to pay EUR200 million to TNT should the deal fail.
We, currently, have a long-term Neutral rating on United Parcel. For the short term (1-3 months), the stock retains a Zacks # 2 (Buy) Rank.
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