Should You Go With United Parcel Service?

| About: United Parcel (UPS)

Talks were already going on between TNT Express and United Parcel Service (NYSE:UPS) for some time now. So, we did see it coming, didn't we? It's officially declared that UPS will buy TNT Express for 5.2 billion euros (equal to $6.85 billion), which will more or less put UPS as the world leader in package delivery outside U.S.

UPS will become the market leader in Europe and also gain access to TNT's stronger networks in the fast-growing Asian and Latin American markets, increasing the U.S. company's global revenue to more than $60 billion (45 billion euros) from $53 billion in 2011, and leaving it with 477,000 employees.

In fact, even FedEx (NYSE:FDX), holding 3% of the transportation market outside U.S., will seem to be small in comparison to UPS after the acquisition. Not to mention, this is one of the biggest acquisitions in the UPS history so far.

Now, if you look at the FedEx operations, it has already announced that it has established operations in Johannesburg, South Africa; Bologna, Italy; and Ankara, and Izmir, Turkey. As part of the company's global expansion initiative, which began in 2008, it has opened a total of 45 offices throughout Europe, Latin America, the Middle East and Asia.

The acquisition of TNT, which will provide better visibility in Brazil and Australia to UPS, is pretty much at the right time I must say. Even in the fourth-quarter results of 2011, although the revenue outside the U.S. increased by $100 million, its operating margin dropped by almost 6%. Not good! It needed proper management and better scale of production to reap bigger benefits. Perhaps this will turn out to be that "turning point" for the company.

Now, what about financing the offer?

Recently, the company already acquired Kiala, a firm based in Brussels that provides convenient delivery options to busy consumers purchasing goods over the Internet. Does the company have enough cash to support its purchase?

Well, it seems that the company plans to utilize $3 billion in existing cash on the balance sheet and through new debt arrangements. It must be noted, by the end of 2011, the company already stowed up around $11 billion in debt. Shareholder's equity already went down by around $90 million, which makes me raise my eyebrows.

More debt? I am getting a little of a skeptic now. Can Scott Davis really pull the thing off, with a champagne glass in his hand? Only time will tell!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.