European Commission breaks silence on decision to block UPS buyout of TNT Express

The European Commission today formally denied UPS Inc.'s proposed $6.8 billion acquisition of Dutch parcel carrier TNT Express, saying the integration would have reduced competition in 15 European Union member states and that the remedies proposed by the two companies failed to quell regulators' concerns.

The action by the EC, the EU's regulatory body, was a formality of sorts. Atlanta-based UPS had telegraphed the regulators' intent when the company said Jan. 14 that it would withdraw its offer to buy TNT Express. However, the EC's two-page statement issued Jan. 30 sheds light for the first time on the reasoning behind the ruling.

UPS, for its part, announced the formal termination of its offer but declined to comment on the EC's ruling or the rationale behind it.

EC REJECTS PROPOSED REMEDIES
In its statement, the EC focused on the impact the proposed deal would have had on the competitive landscape in 15 of the 27 EU member countries. Other than the Netherlands, none of the 15 countries would likely be considered central players in the EU economy.

The EC found that the transaction, if cleared, would effectively have reduced to two—UPS and DHL Express—the number of parcel companies available to transport freight between those countries and the rest of the European Union. A third company, FedEx Corp., did not have the breadth of coverage in the 15 countries to make much of a competitive impact, the EC said.

Regulators noted that UPS had proposed to divest TNT Express' subsidiaries in the 15 member states in question. UPS also had agreed to spin off TNT Express' assets in Spain and Portugal, subject to certain conditions, according to the EC. In addition, UPS had offered the buyer of those assets access to its air network for five years should the buyer lack the air-ground network it would need to provide the synchronized service required of an integrated operator, the EC said.

That wasn't enough to satisfy the commission, however. The EC said that a viable buyer would require an extensive in-house network or suitable partnerships with other companies in order to provide a consistent level of guaranteed next-day deliveries linking the 15 countries and the rest of the continent. "This requirement alone severely limited the number of potentially suitable purchasers, casting doubt over the effectiveness of the remedies," the EC said in its statement.

To dispel those doubts, UPS would have needed to sign a binding agreement with a suitable purchaser before the integration was executed, the EC wrote. But UPS never proposed such a step, and its last-ditch efforts to reach an agreement of that magnitude never materialized.

Prior to withdrawing its offer, UPS tried to strike a deal to sell some assets to DPD, the German parcel unit of the French postal firm La Poste. But the EC determined that DPD lacked the infrastructure to exert "equivalent competitive pressure" to offset TNT Express' absence.

The EC also said it had "serious doubts" that even those few companies expressing an interest in TNT Express' assets had the capability to meet the demands of the intra-European parcel market. A buyer that was not already an integrator would need the "ability and incentive" to invest in developing an air-ground network that would be a competitive force, the EC wrote. "Without sufficient volume in express deliveries it is doubtful that such an incentive would exist," it said.

In what may be cold comfort to UPS and TNT Express given their frustrating, 10-month fight to clear the deal, the EC wrote—almost as a postscript—that "the vast majority of notified mergers do not pose competition problems, and are cleared after a routine review."