Now that UPS Inc. has proposed to ante up $6.4 billion for TNT Express, will FedEx Corp. see its chief rival and raise it a few billion dollars?
Atlanta-based UPS's unexpected and unsolicited Feb. 17 bid for TNT Express prices the offer at 9 euros a share, or $11.87 a share in U.S. currency. TNT Express's rejection of the UPS proposal sets up a possible bidding war between the two U.S.-based parcel giants for the Dutch delivery concern, one of the big four global parcel players.
At stake is no less than possible domination of the intra-European delivery market by UPS—and whether FedEx, or the third big global competitor, DHL Express, will let it happen.
TNT controls 18 percent of the intra-European parcel market, according to estimates from New York investment firm Wolfe, Trahan & Co. DHL is second with 16 percent, followed by UPS with 14 percent. FedEx brings up the rear with just 4 percent market share, according to the firm.
FedEx has been a minor presence in Europe since its decision 20 years ago to exit the intra-continental market and focus its European business on inter-continental routes serving its major commerce centers. The Memphis-based giant has made scant effort in the past two decades to expand its intra-European network, so it may simply take a pass on TNT, especially if UPS hikes its offer—talks between UPS and TNT are ongoing—and pushes FedEx to the limits of its cash hoard.
FedEx had slightly under $1.9 billion in available cash as of the end of its fiscal 2012 second quarter in November 2011, according to investment firm Stifel, Nicolaus & Co. UPS, by contrast, had $4.13 billion at the end of its 2011 third quarter in September.
RAISING THE STAKES
Edward Wolfe, co-founder of Wolfe Trahan, believes that FedEx will join the bidding fray at a higher price than UPS's initial offer and that UPS will also make a higher bid than what is on the table. Wolfe estimates that FedEx could bid up to $17.15 a share without having to issue stock to finance the deal. UPS could bid as high as $19.79 a share without incurring higher borrowing costs, Wolfe said.
A FedEx bid could be designed more to keep TNT Express out of UPS's hands than to have it enter FedEx's embrace, Wolfe intimated. FedEx "could be boxed out of Europe for a long time" if UPS buys TNT, Wolfe said in a research note. A FedEx spokesman declined comment.
DHL, which controls DHL Express, has also remained quiet on the developments. DHL may shy away from a bid for TNT Express for fear of raising the ire of European antitrust regulators. Jerry Hempstead, who runs an Orlando, Fla.-based parcel consultancy bearing his name, doesn't expect DHL to make a bid, expecting it instead to lobby the EU in an attempt to block a UPS takeover.
Hempstead, who held top U.S. sales posts at the old Airborne Express and then DHL, said UPS tried to prevent DHL from buying Airborne in 2003. The deal eventually went through, setting the stage for a six-year debacle that resulted in DHL's losing billions of dollars in a failed effort to gain U.S. parcel market share. DHL ceased domestic U.S. operations in January 2009.
TNT's strength is its integrated intra-European air and ground network. It also has an intra-China business, as well as exposure in Southeast Asia and Brazil. Its inter-continental business focuses on service to and from Europe, though it does operate from the United States to international points. It also operates a U.S.-Europe service in concert with trucking and logistics giant Con-way Inc.
ALL EYES ON UPS
Hempstead believes that UPS will prevail, saying its balance sheet is stronger than FedEx's and it could up the bid for TNT Express with relatively light financial strain. Hempstead also believes DHL will not step in because it is reluctant to do another major deal following the fiasco with Airborne.
Rob Martinez, president and CEO of San Diego-based parcel consultancy Shipware LLC, concurs that UPS's stronger cash position will help it carry the day. Martinez believes UPS will "modestly" boost its initial offer, at which time TNT Express will agree to terms with UPS.
Hempstead cautions, however, that TNT Express should not get too aggressive, noting that UPS's top management, led by Chairman and CEO Scott Davis and CFO Kurt Kuehn, are conservative in nature and do not have a habit of overpaying for anything.
"If [TNT Express] tries to jerk UPS around, I could see UPS taking its cash hoard off the table and saying, in perfect Dutch, 'Hasta la vista, baby!'" said Hempstead. "Davis and Kuehn are not to be trifled with."
The UPS offer, if consummated, would be by far the largest acquisition in its history. Until now, UPS's largest deal was its $1.2 billion purchase of less-than-truckload carrier Overnite Transportation Co. in 2005.
The UPS bid comes a little more than a year after TNT split its mail and express businesses, creating a stand-alone entity for parcel deliveries.