United Parcel Service, Inc. (UPS) has agreed to buy TNT Express in an agreement that values the Dutch express company at roughly 5 billion euros, according to sources close to the deal. The agreement which could be announced as early as tomorrow implies a slightly revised bid from 9 euros to a range of 9.50-10.00 euros.
United Parcel will be the big winner
As a result of the acquisition, United Parcel strikes at equal footing with DHL, the largest delivery operator in Europe as of now. Both companies stand to have a market share of around 18%.
The valuation does seem high on a stand-alone basis, as TNT would be valued at 13-14 times EBITDA vs. a 9-10 multiple in comparable deals. However, analysts point out that the valuation is still justified as synergies could come in at $400 million per year.
All the same, the execution of the deal and integration of TNT's operations could be challenging as this is the biggest acquisition for United Parcel so far. United Parcel's largest acquisition to date is the $1.2 billion acquisition of Overnite in 2005.
TNT shareholders look to end up losers
United Parcel made a 9-euro offer for TNT in February, which led to a spike in TNT's shares to 10.18 euros per share, as shares closed the particular day up 61%. The offer is most likely to be revised from the 9-euro bid towards either 9.50 or 10 euros per share, according to people close to the deal.
While TNT's shareholders receive a healthy premium in the short term, they are the losers in the long run. Shares of TNT traded as high as 35 euros per share about five years ago when initial rumors about a takeover for TNT (which included the postal division at the time) emerged. Shareholders now receive a mere 10 euros for their shares.
The economic slump, the continuous shrink in the postal market and operational problems at the express division have been the major reasons responsible for the dramatic returns.
Fedex misses out in Europe
Main competitor Fedex (FDX) missed out on the last larger independent express company in Europe. The company continuous to corner a blind spot in Europe, with a mere 3.3% market share. Analysts would have at least expected a counter-bid from Fedex for strategic reasons, which could ignite a bidding war for TNT, but Fedex never stepped up. This is rather strange as Fedex itself was in discussions to acquire TNT in the not-too-distant past.
United Parcel is the big winner in this deal. It will be able to acquire TNT for around 5 billion euros. The small increase in the offer of 50 cents to 1 euro represents a little premium and allows the deal to move swiftly.
TNT's management can defend the move to shareholders by saying it could sell the company at a higher price, although in effect it is actually a low price by historical standards. On top of this, management also managed to get guarantees on forced job reductions and divestures of parts of the company.
For the long term, United Parcel has made a great strategic move with the acquisition of TNT. The company takes an important lead over Fedex without having to pay too much.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.