UPS Shareholders Should Applaud The Acquisition Of TNT

Includes: FDX, UPS
by: The Value Investor

While U.S. markets were closed for President's day, European markets experienced gains. One of the biggest gainers was TNT Express (OTCPK:TNTEY), which closed the day up 60.5% to Euro 10.18 after UPS announced its intention to acquire the express carrier on Friday's session.

TNT Express
The company, of Dutch origin, was split up into two separate companies last year. PostNL is the postage division of the company and is focused on the Netherlands. The express division is divested as TNT express.
The company is expected to generate Euro 7 billion in sales for 2011 but is not earning a dime after problems in Brazil and losses in its Asian operations. Its European division, which represents 70% of sales, is modestly profitable with a 6% operating margin, but it is too small to compete with DHL, Fedex (NYSE:FDX) and UPS (NYSE:UPS).

UPS shares slid 2% intra-day on Friday afternoon, after the news of the announcement reached the market. Shares closed the day flat after a late afternoon rally. UPS generated $53 billion in revenue in 2011 on which it earned $4.2 billion in net profit. It is valued at $74 billion, which is 1.4 times sales and 18 times earnings. The company held $5.5 billion in cash and equivalents in its latest filing, making financing of the deal not a problem.

The bid
The bid of 9 Euros represents a 46% premium compared to Friday's close of Euro 6.43. This bid values TNT Express at 4.9 billion Euro. TNT's board rejects the bid, however, it remains in negotiation with UPS. Besides the level of the bid which is a just half the rumored valuation of around 20 Euro just a couple of years ago, the board is also not happy with required divestures in order to get regulatory approval and forced job cuts.

Good deal
UPS shareholders should applaud the deal if it is able to buy TNT at 9 euros. The valuation is about 0.7 times annual revenues vs. a multiple of 1.4 times for UPS. Furthermore, annual synergies in the range of $400 million per year could be expected.
From a strategic point of view, UPS has a one-time chance to expand its European market share from 7.7% to 17.3%, making it a close competitor of German DHL which has a market share of 17.6%
It would create a duopoly in Europe, as Fedex has a mere 3.3% market share in Europe.

Shareholders should tender
TNT's investors are speculating on a bidding war between the two U.S. shipping giants as they pushed the shares up to Euro 10.18, 13% above the price that UPS offered for the company. While a bidding war could ignite a final price towards 12-15 Euro, it would still make a bargain for whoever runs away with TNT.
TNT's shareholders should tender any offer as the company is too small to compete on a global basis and lacks management capabilities in order to create enough value to justify such a valuation on a standalone basis.

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