Earlier this month, FedEx (NYSE: FDX) launched a $4.8 billion takeover offer for Dutch package delivery company TNT Express (OTC: TNTEY). FedEx believes it is a well-timed move, taking advantage of both a strong U.S. dollar and growing e-commerce in Europe.
The TNT acquisition unites the No. 3 and No. 4 delivery companies in Europe, in an effort to better compete with the No. 1 and No. 2 companies: DHL – owned by Deutsche Post (OTC: DPSGY) – and United Parcel Service (NYSE: UPS).
The Logic(istics) of the Move
On the surface of it, the deal makes sense.
It brings together FedEx’s already strong air express delivery service with TNT’s European ground network. TNT’s network connects more than 40 countries on the continent.
The move will allow FedEx to compete more effectively with its arch rival UPS. According to a recent Wall Street Journal article, FedEx has 10% of the international express delivery market in Europe, while TNT has 12% and UPS has 25%.
Source: The Wall Street Journal
Back in 2013, UPS also tried to buy TNT. But it was slapped down by European regulators, who said the deal would have given UPS too much control of the marketplace.
The current takeover should face less harsh criticism from regulators, since there is much less overlap between FedEx and TNT.
But that does not mean it will be a smooth road ahead for FedEx.
You see, ever since the failed takeover by UPS, TNT has struggled. It has gone through a series of failed restructurings, and 2014 saw it report its fourth consecutive year of losses.
In the fourth quarter of 2014, TNT reported a loss of 137 million euros due to rising restructuring costs. TNT said additional restructuring costs are expected to be around 250 million euros between 2015 and 2017.
The company warned that 2015 would be a year with “adverse trading conditions” across its core Western European market. It added that conditions would not improve until 2016.
What the company is saying here is that competition is stiff. And like its competitors, it is having trouble adjusting to an e-commerce world.
To look at it another way, TNT’s operations are not running as smoothly as the Netherlands’ famed Clockwork Orange soccer team that once was the scourge of soccer rivals.
The Outlook: FedEx Has a Great Chance to Score a Goal
Nonetheless, it looks like a good deal for FedEx.
First, it is paying 30% less in dollar terms and 15% less in euro terms for TNT than UPS offered a few years ago.
Despite TNT’s troubles, there will be very tangible benefits for FedEx, which has been perennially weak in Europe.
The company plans to build its position in Europe by feeding lots of parcel volume into TNT facilities, such as its huge air cargo hub in Liège, Belgium.
FedEx CFO Alan Graf told analysts that the biggest opportunity in Europe is in the “reduced pick-up and delivery cost that FedEx will enjoy as a result of TNT’s network.”
In other words, the costs of building major sorting facilities is large. But running them costs little, especially when running near capacity.
The challenge here is to keep the facilities full, but not congested. When you think of congestion, just think of the mess UPS had the past two Christmas holidays.
FedEx seems to be going into this logistics merger with its eyes wide open. Its CFO pointed to a three- to four-year time frame for integration of TNT into FedEx.
That’s good. Maybe by the end of that time frame, its delivery system in Europe will bring back memories of the Clockwork Orange.
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