United Parcel Service Inc. (UPS) agreed to buy TNT Express NV (TNTE) with a sweetened bid of 5.16 billion euros ($6.8 billion), the biggest purchase in the U.S. company’s 105- year history, to challenge Deutsche Post AG (DPW) in Europe.
TNT accepted an offer of 9.5 euros a share in cash, the companies said in a joint statement today. That’s 5.6 percent more than the 9-euro bid turned down last month by Hoofddorp, Netherlands-based TNT and 54 percent more than the closing price on Feb. 16, the day before the talks were made public.
UPS, already the world’s largest package-delivery company, will double in size in Europe and vault to equal footing there with Deutsche Post (DPW)’s DHL, the market-share leader. The tie-up with money-losing TNT will immediately add to earnings on an adjusted basis once the deal is done, Atlanta-based UPS said.
“To buy something at the bottom of the market like this at an attractive price like this is great,” said Art Hatfield, a Morgan Keegan & Co. analyst in Memphis, Tennessee. “The market always wants to focus on the next quarter, but corporations think in terms of what this means for the next 30 to 40 years, and this is a tremendous deal for UPS.”
UPS gained 3.4 percent to $81.11 at 4 p.m. in New York, the biggest advance since Nov. 30. Hatfield is among 18 analysts recommending buying UPS, compared with eight who urge holding the shares, according to data compiled by Bloomberg. TNT rose 1.1 percent to 9.44 euros in Amsterdam.
‘Confident’ of Approval
UPS is “confident” the deal will receive regulatory approval by the end of the third quarter, Chief Financial Officer Kurt Kuehn said, adding that it’s too early to say what divestitures may be needed to satisfy concerns.
The combination should produce pretax cost savings of 400 million euros to 550 million euros annually after four years, and the integration expenses will be about 1 billion euros over that same period, according to UPS.
UPS said it will finance the purchase with $3 billion in cash, and the rest with debt. The company had $4.3 billion in cash and equivalents as of the end of December and generated about $5 billion in free cash last year.
“We have a top-class balance sheet, so we have the ability to make this happen” with minimal credit risk, Kuehn said on a conference call with analysts.
UPS has ratings of AA- from Standard & Poor’s and Aa3 from Moody’s Investors Service, each company’s fourth-highest grade. S&P said today it is keeping UPS on “CreditWatch” with negative implications, the status placed on the company on Feb. 17 when the first TNT bid was disclosed. Moody’s put UPS’s rating under review for a possible downgrade.
At 9.50 euros a share, the deal values TNT at 13 times its last four quarters’ earnings before interest, taxes, depreciation and amortization, compared with a median of 10 times trailing Ebitda in nine other similar deals, according to data compiled by Bloomberg.
The purchase comes as Europe’s economy shrinks toward what the International Monetary Fund predicts will be a “mild recession” in 2012. The euro area may contract 0.5 percent compared with a previous estimate of 1.1 percent expansion, the Washington-based IMF said on Jan. 24.
Investing in TNT means UPS won’t soon meet its target of a 25 percent return on investor capital, Kuehn said. Cost savings will be primarily found in intra-national delivery services, combining the two air networks, and in administration and procurement, he said.
Executives declined to say how many of TNT’s 77,500 jobs might be eliminated. UPS would rely on “attrition first before we have forced redundancies,” Chief Executive Officer Scott Davis said at a press conference in Amsterdam.
While UPS intends to retain the Cologne-Bonn airport as its main air cargo hub in Europe, the company has no plans to shut TNT’s Liege facility in Belgium, which employs 1,400 people, Davis said. The TNT brand eventually will be dropped, UPS said.
“In this environment with little economic growth, there’s going to be a lot of noise to protect jobs and that’s going to be something they’ll have to handle very delicately,” said Matt Collins, an analyst at Edward Jones & Co. in St. Louis, who recommends holding UPS.
The U.S. company controlled 7.7 percent of the European express-parcels market in 2010, compared with TNT’s 9.6 percent, according to industry researcher Transport Intelligence. Together they would be about as large as DHL, which had 17.6 percent.
Deutsche Post expects antitrust regulators to examine the deal very closely, said Dirk Klasen, a Bonn-based spokesman.
Buying TNT will be UPS’s biggest purchase since UPS was founded in 1907 as a bicycle-messenger service. The deal tops the 2005 acquisition of Overnite Corp. (OVNT) for about $1.25 billion in cash, which gave UPS the ability to make U.S. land shipments of parcels too large to be lifted by a driver.
International packages generate the most revenue for UPS, at $19.30 each in 2011, compared with $9.30 per domestic parcel. The portion of UPS’s revenue that comes from outside the U.S. will jump to 36 percent of the total with the TNT purchase, up from 26 percent currently. The company’s total revenue last year was $53.1 billion.
Low interest rates also helped make this an attractive time to buy TNT, UPS’s Davis said on the call. Yields on 10-year U.S. Treasuries (USGG10YR) fell for a ninth straight trading day, the longest slide since June 2006, to 2.3 percent as investors bet a strengthening U.S. economy will diminish the appeal of government securities.
UPS, known for its brown paint scheme on vans and trucks and employee uniforms, has $13.3 billion in bonds and loan facilities outstanding, of which $2.3 billion falls due this year, according to data compiled by Bloomberg.
TNT was spun off in May from PostNL NV (PNL), the Dutch postal operator, which said it will tender its 29.8 percent stake. After posting a 2011 operating loss of 105 million euros, TNT announced plans last month to focus on Europe, where it reported an operating profit.
A bid by UPS or FedEx Corp. (FDX) had long been fodder for industry speculation as the U.S. companies studied expansion in Europe. TNT Chairman Antony Burgmans said today a counterbid from FedEx was “highly unlikely.” FedEx doesn’t comment on competitors, said Baerbel Bussenius, a spokeswoman in Brussels.
TNT, whose name derives from the postwar Australian company Thomas Nationwide Transport, sold its Indian domestic road business in December and has been hurt by costs from revamping unprofitable Brazilian operations.
“The strength of TNT is as a European franchise,” CEO Marie-Christine Lombard said at the Amsterdam press conference. “We’ve always missed the U.S. link; it was a well-known issue for us. This combination will benefit our customer base by being able to offer a U.S. capability.”
Morgan Stanley (MS), UBS AG (UBSN) and Bank of America’s Merrill Lynch unit were financial advisers for UPS. TNT Express worked with Goldman Sachs Group Inc. (GS) and Lazard Ltd. (LAZ) advised the Dutch company’s supervisory board. Freshfields Bruckhaus Deringer LLP (1002L) was UPS’s legal adviser and Allen & Overy LLP (323556L) worked with TNT.
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