Smith goes for the gusto in Europe as FedEx launches $4.8 billion buy-out of TNT Express

He said he wouldn't do it. But that was three years and 2 billion fewer dollars ago.

By Mark B. Solomon

In March 2012, Frederick W. Smith, founder, chairman, and CEO of FedEx Corp., said it would not counter rival UPS Inc.'s $6.8 billion bid for international delivery firm TNT Express. FedEx's European business was already doing fine through organic growth, Smith said, adding that the company had the firepower and momentum to succeed in Europe on its own.

It took three years and a $2 billion cheaper price tag than UPS' subsequently failed proposal to convince Smith to change his mind. But today the 70-year-old legend of the transportation world pulled the trigger on something he had said he wouldn't do: acquire TNT Express.

The $4.8 billion all-cash acquisition of the Dutch firm is the largest in FedEx's 44-year history as a public enterprise. It also restores the Memphis, Tenn.-based company's European footprint to a size not seen since 1992, when it ended an ambitious European expansion program and withdrew from all but the continent's major commerce centers. Over the subsequent two-plus decades, FedEx gradually rebuilt its European network through internal growth and a series of smaller acquisitions in the U.K., Hungary, France, and Poland, the latter two announced shortly after UPS announced its offer in early 2012 to buy TNT. But nothing up to now compares with the impact of today's announcement.

In a joint statement, the companies said the transaction would meld TNT Express' strong European road platform and its air hub in Liege, Belgium, with FedEx's global capabilities that feed largely off of its North American and Asia-Pacific networks. Tex Gunning, TNT Express' CEO, said the company did not solicit a buy-out offer and was prepared to execute a five-year operational turnaround, called "Outlook," which launched last year.

Gunning said TNT Express' customers would benefit from working with one provider with broader geographic reach and a more robust product portfolio. He added that TNT Express shareholders will reap benefits today that "otherwise would only have ben available in the long run." The deal, which based on the current value of the U.S. dollar to the euro works out to be about $8.70 a share, represents a 33-percent premium over TNT Express' April 2 closing price. The deal is expected to close in the first half of 2016.

Smith's comments implied that, despite the gains that have been made through internal growth and so-called tuck-in acquisitions, FedEx needed to go large to keep pace with the rapid changes in global business and shipping. "This transaction allows us to quickly broaden our portfolio of international transportation solutions—especially the continuing growth of global e-commerce—and positions FedEx for greater long-term profitable growth," he said.

It may also be a reflection of Smith not wanting to be on the outside looking in as Europe moves towards a fitful recovery on the heels of quantitative easing measures recently implemented by the European Central Bank (ECB). FedEx brings up the rear in market share among the four major parcel carriers in Europe. About 30 percent of its international revenue comes from Europe, compared to 50 percent for UPS, according to investment firm Morgan Stanley & Co. Several analysts surmised back in 2012 that UPS wanted TNT in part to keep FedEx locked in last place with no chance of nailing a "homerun"-type acquisition to send its Euro market share soaring.

EUROPEAN APPROVAL
The FedEx-TNT Express deal was approved by the boards of both companies but still must pass muster with European regulators. The European Commission (EC), the European Union's antitrust arm, scotched UPS' offer in January 2013. But FedEx stands a better chance of having its deal approved because its intra-European market share is significantly lower than that of UPS', according to Jerry Hempstead, a former top U.S. official at DHL Express and now an industry consultant.

Share estimates of the European parcel market have historically been all over the lot. One estimate from DHL Express, Europe's largest delivery concern, showed that DHL has 41 percent of the cross-border delivery market, UPS has 25 percent of the market, TNT has 12 percent, and FedEx has 10 percent. The breakdown does not include intra-country and intercontinental airfreight services.

By contrast, data compiled by the U.S. consulting company Shipware LLC found that DHL has 19 percent of the market, followed by UPS with 16 percent, TNT with about 12 percent, and FedEx with less than 5 percent. The one common thread among these and other estimates is that the combined FedEx-TNT entity now becomes the second-largest European parcel company.

Hempstead said he doesn't think UPS, which was the only prospective buyer for TNT Express in 2012, will counter the FedEx proposal because of the EC's prior ruling. EU antitrust officials rejected the UPS-TNT deal because of market dominance and anticompetitiveness concerns, though UPS and TNT proposed several divestiture steps to try to assuage antitrust issues. UPS even approached FedEx about buying some of TNT Express' assets, but the discussions were very preliminary and went nowhere.

Susan L. Rosenberg, a UPS spokeswoman, said the company will study the FedEx-TNT deal but declined further comment. Claus Korfmacher, a DHL spokesman, also would not comment on DHL's plans. However, it issued a statement saying a FedEx-TNT Express combination would provide "additional business opportunities" for DHL because large-scale integrations often cause disruptions for the combined company's customers, supplies, and staff, a scenario under which DHL could benefit.

DHL said the combination will "undoubtedly result in significant competitive changes in the express and logistics industry in Europe as well as in various other regions worldwide."

One of those regions could be Latin America. In 2012 FedEx acquired Rapidao Cometa Logistica e Transportes SA, a move that enabled FedEx to expand into the Brazilian domestic express market. Three years earlier, TNT Express acquired Brazilian-based Aracatuba, which has a nationwide network and connects Brazil with Argentina, Uruguay, Paraguay, Chile, Bolivia, and Peru. That year, TNT Express also acquired LIT, a Chilean domestic express provider. The new combined network will be integrated to make FedEx a stronger presence throughout South America, according to Cathy Roberson, a U.S.-based analyst for Transport Intelligence, a U.K. consultancy.

IMMEDIATE GAINS
Rob Martinez, Shipware's CEO, said the move immediately vaults FedEx into European prominence by adding TNT Express' sizable continental ground network to FedEx's freighter fleet serving the region. FedEx will benefit most notably in France and the U.K., where it doesn't have a strong road-haulage presence, Martinez said. TNT Express, meanwhile, can leverage FedEx's system to expand into North America, where its market share is virtually negligible.

The dollar's appreciating value versus the euro was a key reason FedEx was able to buy TNT Express for about $2 billion less than the UPS offer. On March 19, 2012 when UPS revised its initial offer for TNT Express upward by $400 million to $6.8 billion, the U.S. dollar was trading at .7142 to the euro. Today, the U.S. dollar is trading 28.9 percent higher at .9211. A strong dollar elevates the purchasing power of U.S. companies looking to expand in markets like Europe via acquisition.

But currency fluctuations may have been just one factor. During the 10-month period that the UPS offer was on the table, TNT Express was adrift. It was piling up losses in Europe, Brazil, and Asia; confronting declining customer service metrics; and facing turmoil in its upper management ranks. In September 2012, its CEO abruptly resigned, adding to the theory that TNT Express was in limbo, waiting either for a suitor to snap it up or to just fade into irrelevance against the likes of FedEx, UPS, and DHL Express.

Left on its own after UPS abandoned its bid, TNT Express has continued to struggle financially over the past two years. Revenues have declined year-over-year. It posted a 2014 operating loss after a significant drop in operating income in 2013 over 2012 results. Losses widened to 190 million euros in 2014 from 122 million euros in 2013 and 84 million euros in 2012. The company's market capitalization had eroded, giving FedEx an entry at a much lower price point than UPS enjoyed.

During the first half of 2014, however, TNT Express revamped its management team with turnaround experts. It sold off expensive aircraft assets in favor of leasing arrangements, modernized its road network, and continued work on improving its Liege hub, which should be complete din 2016.

Hempstead, who had given TNT Express up for dead after UPS walked away, said he was impressed by the steps the company has taken since then. "TNT Express is a very different company than it was in 2012," he said.