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UPS to Purchase TNT Express for $6.8 Billion

Published: March 19, 2012 | 8:05 am
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United Parcel Service Inc. (UPS) will buy TNT Express NV (TNTE), Europe’s second-largest express delivery company, for 5.16 billion euros ($6.8 billion) in the biggest deal in the U.S. company’s 105-year history.

UPS, the world’s largest package-delivery company, secured the purchase after raising its offer to 9.50 euros a share in cash, the companies said in a joint statement. TNT’s management and supervisory boards recommend shareholders accept the deal, they said in the statement.

The combination of Atlanta-based UPS with TNT will put the company on equal footing in Europe with Deutsche Post AG (DPW)’s DHL, the region’s biggest delivery operator. The deal secures a higher value on the money-losing Dutch company than the 9 euros a share that directors turned down last month and is a 54 percent premium to the closing price of 6.18 euros on Feb. 16, the day before the talks were made public.

“I thought that a lot of shareholders would have accepted 9 euros,” said London-based Credit Suisse analyst Neil Glynn, who has a “neutral” rating on TNT Express. “I think UPS is paying a very, very big number. The synergies they’re seeing are pre-tax, it’s important to remember.”

The agreement creates an express-delivery provider with 45 billion euros in revenue, and the combination will result in pre-tax cost savings of 400 million euros to 550 million euros annually by the end of the fourth year after the deal closes, the companies said in the statement. The cost of combining with TNT over the four-year period will be about 1 billion euros.

Acceptance Rate
UPS seeks a minimum acceptance rate of 80 percent of TNT shareholders. PostNL NV (PNL), the largest owner, said it will tender its 29.8 percent holding. UPS expects the competition clearance for the deal by the end of the third quarter.

TNT closed at 9.35 euros in Amsterdam on March 16, giving the Hoofddorp, Netherlands-based company a market value of 5.08 billion euros, according to data compiled by Bloomberg. The stock has fallen 1.1 percent in the past year, compared with a 2.4 percent decline for Amsterdam’s AEX-Index.

UPS traded at $78.41 in New York for a $75.2 billion market value. It’s risen 9.5 percent in the past year, in line with a 9.8 percent gain for the S&P 500 Index and surpassing a 5.7 percent increase for FedEx Corp.

Deal Valuation
At 9.50 euros a share, the deal values TNT at 13 times its last four quarters’ earnings before interest, taxes, depreciation and amortization, compared with a median of 10 times trailing Ebitda in nine other similar deals, according to data compiled by Bloomberg.

UPS has an AA- rating from Standard & Poor’s and an Aa3 grade from Moody’s Investors Service. That’s the fourth-highest investment level in both cases.

UPS, known for its brown vans and trucks, has $13.3 billion in bonds and loan facilities outstanding, of which $2.3 billion falls due this year, according to data compiled by Bloomberg. Its debt burden is the same size as a year ago, the data show.

The extra yield investors demand to hold UPS’s $1.5 billion of 3.125 percent bonds due in 2021 instead of Treasuries decreased 10 basis points this year to 60 as of March 16, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Credit-default swaps on UPS cost 47 basis points as of March 16, from 51 on Dec. 30, CMA data show. An index of default-swap contracts on 30 global transportation companies was last at 139, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Market Share
UPS controlled 7.7 percent of the European express-parcels market in 2010, compared with TNT’s 9.6 percent, according to Transport Intelligence. Combined, they would be about as large as DHL, which had a 17.6 percent share.

Buying TNT will be UPS’s biggest purchase since the company was founded in 1907 as a bicycle-messenger service. The deal tops the 2005 acquisition of Overnite Corp. (OVNT) for about $1.25 billion in cash, which gave UPS the ability to make U.S. land shipments of parcels too large to be lifted by a driver.

International packages generate the most revenue for UPS, at $19.30 each in 2011, compared with $9.30 per domestic parcel. The $12.2 billion in sales for that business last year was 23 percent of UPS’s $53.1 billion total, which the company doesn’t disclose on a regional or country-by-country basis.

The final stages of talks played out after TNT said Feb. 17 it rejected a “highly conditional” UPS offer while saying the sides were still meeting. UPS said March 16 that negotiations had been extended.

Union Opposition
TNT directors were unhappy with terms attached to the initial offer that may have required divestitures to win regulatory approval, possibly leading to job cuts, a person familiar with the matter said last month.

The company’s four main unions wrote Chief Executive Officer Marie-Christine Lombard and Supervisory Board Chairman Antony Burgmans on March 6 to express opposition to “forced” job reductions. TNT employed about 77,500 people as of Dec. 31.

TNT was spun off in May from the Dutch postal operator, which is now named PostNL. TNT, whose name derives from the postwar Australian company Thomas Nationwide Transport, sold its Indian domestic road business in December and has been hurt by costs from revamping unprofitable Brazilian operations.

After posting a 2011 operating loss of 105 million euros on Feb. 21, TNT said it would refocus operations on Europe, where its operating profit was 356 million euros last year. Operating losses were 360 million euros in the Americas and 76 million euros in the Asia-Pacific region.

Credit Line
The company has a 570 million euro revolving loan facility, which hadn’t been drawn down as of Dec. 31, and no bonds, according to data compiled by Bloomberg. It has a BBB+ credit rating from Standard & Poor’s, the eighth-highest grade, while Moody’s Investors Service rates it a level lower at Baa2.

A bid by UPS or FedEx had been fodder for industry speculation for years as the U.S. companies studied expansion in Europe.

That talk gained momentum following the spinoff of TNT as an express operator, and some analysts and investors had predicted a possible late bid by FedEx (FDX) after UPS’s interest was announced, a scenario that never came to pass.

In an industry in which UPS, FedEx and DHL already operate on a global scale, TNT was a “once-in-a-lifetime chance” for one of the biggest competitors to grow by acquiring a substantial rival, Katrina Dudley, a portfolio manager at Mutual Series, a Franklin Templeton Investments unit, said last month. Mutual Series owns TNT shares.

UPS has completed the acquisition of Brussels-based Kiala to bolster operations in Belgium, France, the Netherlands, Spain and Luxembourg, after several smaller purchases in recent years, said David Campbell, a Thompson Davis & Co. analyst in Richmond, Virginia, who recommends buying UPS and FedEx.


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