FedEx to succeed where UPS failed?

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MEMPHIS: Rating agency Standard & Poor's (S&P) has confirmed its 'BBB' rating for FedEx Corporation with a 'stable' outlook following the announcement of the integrator's proposed US$4.8 billion takeover of TNT Express.

Assuming the European Commission has no objection, FedEx said it expects to finalize the purchase with $1.5 billion in cash and new debt by the first half of next year.

According to S&P credit analyst Betsy Snyder: "Standard & Poor's ratings on FedEx reflect the company's improved credit metrics, bolstered by its ongoing efforts to increase profitability, which should cushion the effect of the incremental debt associated with the proposed acquisition."

The agency said it expects FedEx's ratio of debt to ongoing operations' revenue to fall from 35 to 30 percent at acquisition and then recover within two years as the company benefits from an increased European presence, cost synergies related to the acquisition, and a shift in its discretionary cash flow from share repurchases to debt reduction.

At the time of the US$6.8 billion UPS bid to acquire TNT Express in 2012, the two companies estimated cost savings of €400-€550 million as a result of any merger. The following year the deal was denied by the European Commission (EC) on the grounds that customers would be subjected to higher prices from a subsequent de factoexpress parcel duopoly of DHL and UPS. The Commission concluded that because FedEx held the smallest market share in all 29 European Economic Area countries, it would have been unable to provide sufficient competition.

However with TNT's European road network connecting 41 countries via 19 hubs and over 540 depots, FedEx has the opportunity to reach 70 percent of customers overnight by truck rather than air – thereby satisfying the Commission's requirement for an express market operator to provide shippers with an enhanced, integrated global network without raising prices.

Notwithstanding unanimous support from both companies' boards for the deal, should TNT Express fail to merge for a second time following a possible EC objection, FedEx has agreed to pay a termination fee of €200 million – similar to that paid by UPS. However should TNT accept another offer in the next eight weeks that is in excess of €5.2 billion, it has agreed to pay FedEx €45 million in compensation should the integrator decline to match it.

S&P said it could raise its current rating for FedEx following any successful merger if the company manages to increase its operations' revenue-to-debt ratio from 35 to 40 percent by 2018.

FedEx and TNT Express said they intend to file a request seeking approval of the deal from the Dutch financial regulator - which includes finding a new owner/operator for TNT's air fleet - in the next six weeks. They added that current TNT CEO Tex Gunning and CFO Maarten de Vries are expected to stay in any post-merger company.