DHL’s payback, FedEx’s opportunity?
There’s nothing clean or simple about UPS’ proposed $6.3 billion takeover plan of TNT Express, a deal that would create a logistics giant poised to put competitors FedEx and DHL far in the rearview mirror.
Due to competition concerns raised by the European Commission — preventing a monolithic juggernaut that would stifle all competition is the motivating factor, it seems — the celebration of this integration union has been put on hold, and its consummation has been pushed back to February at the earliest. Industry insiders are mixed about the possibility of the deal, with most thinking it will eventually go through. However, there’s no doubt that the European Union is trying to get as much out of the deal as possible.
Begrudgingly, TNT and UPS recently agreed to a number of the European Union’s recommendations, steps that would, in theory, secure the European government’s much-needed approval of the deal. If the merger happens, officials have said UPS will sell off business assets and grant air rights to third parties, essentially renting out its logistics network to smaller integrators and logistics entities. Details of how this might work, or if these concessions are enough to push the merger through, have not been released. Earlier this fall, TNT Express decided to sell TNT Airways and its Pan Air holding to ASL Aviation Group if the European Union decides to let UPS and TNT combine.
According to a company press release, ASL, which currently owns Safair, Europe Airpost and Ireland-based Air Contractors, has pledged to keep the current TNT and Panair routes intact. The goal here, apparently, is to position ASL as a neutral player which can farm out services to carriers as needed.
Opening up UPS to other companies and selling off TNT’s assets might solve the European Union’s issue with the deal, but could something else be holding up the merger? Those close to UPS believe the European Union is simply posturing to get ever more concessions from UPS, but that an agreement will ultimately be reached.
Independent U.S. logistics analysts put some of the blame in a different direction. While they haven’t heard anything specific about other integrators trying to crumble the deal, these sources said they would be shocked if there weren’t some sort of machinations behind the scenes. While they don’t see DHL as a puppet master, of sorts, they acknowledge if the European integrator had a hand in this at all, it might have been to exact a bit of revenge. When DHL was trying to enter the U.S. market to move in on DB Schenker’s July 2011 decision to shut down air freight services, UPS tried to forestall the development.
“Although as it turns out, all the self-inflicted wounds that DHL suffered turned out to be more damaging than anything anyone else could have done to them,” one source said.
A European source with direct knowledge of the merger discussions but who could not be named on the record, confirmed the suspicion that DHL has the European Commission’s ear, saying he knows the express carrier is involved and that “it’s payback time for DHL.”
This source has spoken closely with European logistics companies that are concerned about the merger, but are not necessarily opposed to a deal. The companies’ hesitancies are rooted in the price increases that occurred in the U.S. market after DHL exited. They think something similar would happen in Europe and want to make sure competition in the European Union stays “sufficient,” the source said. He also suggested some parts of the TNT parcel service — perhaps those in the United Kingdom and the Benelux countries — need to be sold and those would be prime pieces for a company like FedEx. Whatever happens, he added, competition will tighten up.
“When TNT and UPS merge, you have only two express companies left; this will certainly have a negative impact on (European) rates, just like in the U.S,” he said.
Finally, some take a more blunt view of the acquisition talks, saying the European Commission won’t be happy until it cannibalizes TNT, and that’s the only way the merger will happen. The renting out of UPS’ supply chain space could create an interesting development in the European market, but it will also be messy, this analyst close to UPS said. A divestiture of potential UPS assets could end up benefitting its main U.S. rival, however. Though FedEx isn’t exactly positioned to establish an overwhelming presence in Europe due to the poor logistical location of its base in France, the company will definitely be picking up the pieces of the UPS/TNT sell off, the source said.
“FedEx might have to be a strategic scavenger,” the source said. “If UPS can pull this off … I think FedEx will be in a better position.”
Post merger, the top two major players in the U.S. market will become Nos. 1 and 2 players in the world. Add DHL, and that’s quite a big three to dominate the industry, he said. He also said the merger will only have a minimal affect on the U.S. market, with most of the action happening in Europe. Through its company spokesman, FedEx had no comment.
It’s taken a long time to get to even this uncertain and somewhat confusing state of affairs. Nearly a year ago, TNT Express released a statement that it had received an unsolicited takeover offer from UPS, confirming industry rumors that had been circulating for quite some time. That first offer from UPS stood at 9 euros per share, a figure that the TNT board rejected. A little more than a month later, the two integrators came to an agreement: The price was to be 9.50 euros per share, a near 50 percent increase over TNT’s actual pre-negotiation value of 6.18 euros per share.
According to published reports, TNT stocks have been volatile recently, with the company’s most recent numbers showing a decline. TNT’s upper management is a bit unstable as well. Marie-Christine Lombard, TNT Express’ chief executive officer, left at the end of September for the CEO job at Geodis.
Could a green light from the European Commission provide some needed stability in the European integrator landscape? Could FedEx emerge as a major player in Europe? The logistics industry waits on bated breath for the answers.