FedEx Corp (FDX, Financial) is all set to buy Dutch package delivery firm TNT Express for $4.8 billion, to challenge its rivals in Europe. United Parcel Service (UPS, Financial) and DHL are other major package delivery firms in Europe. Let’s dig in deeper to understand how this deal could be favorable for FedEx in the long run.
Creating a strong foothold in Europe
A takeover of TNT by United Parcel Service in 2013 was blocked by European regulators because of concerns about increase in competition in the market. FedEx is predominant in the air network and is expected to complement TNT’s large European road network. FedEx’s Chief executive Fred Smith said that Europe is still an enormous market for import and export despite the decrease in growth. FedEx has struggled to expand its presence in Europe.
This deal is expected to expand FedEx’s foothold in the European market. Fred Smith also added that the deal with TNT was under the influence of strengthening of the U.S. dollar and reflects that lower oil prices and the European Central Bank’s monetary stimulus were delivering a boost to Europe’s economy. In fact, the European Central Bank has projected the euro-zone GDP to grow 1.5% in 2015 and 1.9% in 2016, driven majorly by decline in oil prices.
TNT would offer FedEx access to pan-European service and in areas where the latter is currently a very minor player. Also, TNT’s customers would gain access to FedEx’s global distribution platform. Also, rapid growth in FedEx’s market share in Europe is a factor that can’t be disregarded after the deal goes through.
Terms of the deal
In a joint statement, the companies agreed that the management of both have reached a “conditional agreement.”
FedEx will pay €8 per share for TNT in an all-cash deal, this values the Netherland based company at €4.4 billion ($4.8 billion), and this is a 33% premium on last week’s closing share price as on April 2. UPS pulled out of a $6.8 billion takeover attempt of TNT in 2013 because of opposition from Europe’s then antitrust chief.
Chairman of TNT, Antony Burgmans said that this deal is much simpler than the UPS-TNT deal and will easily clear the European regulators screening process. TNT’s European express courier market share has fallen as much as 5% since the UPS deal fell apart. The Dutch company has taken effective measures like cost cuts, selling operations and investing in the road network to hold on to customers in a frail European market.
TNT warned in February that it awaited unfavorable market conditions in its Western European markets this year, as it reported a €196 million annual loss on revenues which decreased 3.2% year-over-year to €6.6billion in the latest quarter.
Any other logistics competitor in Europe is allowed to make an offer to acquire TNT within next eight weeks as per the terms of the deal. Also for the current deal to be terminated, the offer should exceed the existing proposal by at least 8%.
Creating a niche player amid intense competition
European package delivery market is dominated by five major players and they constitute more than half of the market share. France and Germany having the highest market share by country, followed by UK, Italy and Spain.
If FedEx successfully buys TNT, it would create a market rival for DHL and UPS in the European market. The combined company is expected to have a 17%-18% share in the express courier market. As per data of 2013, FedEx is one of the smaller players with a market share of about 5% in Europe, while DHL leads at 19% followed by UPS at 16% and TNT at 12%. So, the FedEx-TNT deal could aid in making FedEx the second largest logistics player in Europe.
FedEx is financing the all-cash deal with debt but is also the latest company to take advantage of the low interest rates. The deal is also recommended by TNT’s supervisory board. PostNL (PTNL, Financial) is TNT’s largest shareholder and it will also tender its 14.7% share to FedEx.
Conclusion
Though this deal seems to be a great opportunity stimulating FedEx’s growth in Europe, it has been confirmed that this deal would enter the completion phase only by early 2016, subject to approval from the European antitrust regulators. So, investors are keen to find out whether the deal is able to pass the acid test and how it finally helps in growing the top line of FedEx in Europe, in the long run.
