TNT Express NV said that it has rejected a 9 euro a share takeover offer from United Parcel Service, Inc. (NYSE:UPS). The offer, which values TNT at 4.9 billion Euros ($6.5 billion), would value TNT at 10x 2012 EV/EBITDA and represents a 42 percent premium to TNT's closing price on Feb. 17.
TNT, which spun off its Express and Mail divisions to become two separate companies – TNT Express and PostNL -- in May, said though it rejected the bid it is still in talks with UPS. TNT may be seeking an increased offer from UPS. The deal is also the largest acquisition announced by UPS on record, according to Dealogic.
For 2011, TNT reported a loss of 270 million Euros, compared to a profit of 66 million Euros in 2010. Revenue rose 2.7 percent to 7.25 billion Euros. The Netherlands-based TNT, which expects 2012 to be "challenging," said it would reduce fixed costs by 150 million Euros by the end of 2013.
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"We wouldn't be surprised if this transaction ultimately was completed. We are not surprised that TNT management rejected the first offer and is probably looking for a little sweeter deal. All in, we believe a combination of UPS and TNT would be marginally accretive to begin and get progressively more profitable over time," RBC Capital Markets analyst John Barnes wrote in a note to clients.
On the other hand, it has been widely speculated that UPS rival FedEx Corp. (NYSE:FDX) would be the logical buyer of TNT to boost its presence in Europe. While FedEx management has stated time and again that it has little interest and believes the valuation is too rich, investors still held notion that FedEx would eventually be the buyer.
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But, Barnes feels UPS would be a better buyer of TNT for the following reasons:
- UPS is the better buyer due to the free cash flow generation of the company. The analyst expects UPS to generate free cash flow of $4.7 billion in 2012 that when coupled with nearly $6.0 billion of cash on the balance sheet provides significant dry powder to consummate a transaction of this magnitude. Essentially, UPS would be buying TNT for the equivalent of five quarters of its free cash flow.
- Barnes said UPS' offer likely closes FedEx out due to balance sheet and cash flow limitations and current valuation. In addition, given that both companies control about 24 percent to 25 percent of global international express market share, the addition of TNT would still leave either with just below 40 percent total market share.
- The analyst said UPS could achieve more synergies from TNT acquisition. UPS could cull out 20 million of Euros of head office expense, take the TNT Asia loss of about 40 million Euros and TNT US loss of about 20 million Euros to breakeven and generate synergies equivalent to 3 percent of TNT's forecasted revenue resulting in another 192 million Euros of savings.
"All in, this would sum to savings of ~270M Euros (or $353.7M) to the EBITDA line. Assuming the deal was completed late in 2012 and these savings were realized in 2013, the savings would add 3.5% to our $10.1B EBITDA forecast," Barnes said.
- Regardless of the near term accretion, the transaction would prove more valuable over time. First, it would add incremental volume into UPS' already mature and well established U.S., Asian, and European operations. In addition, UPS is making this bid when the European economy is weak and the parcel volumes are under pressure.
"We believe UPS may be looking at this deal and saying 9 Euros per share now versus 15 Euros per share or higher when the European economy starts growing again," the analyst said.
Meanwhile, global Transportation M&A stands at $11.6 billion in year-to-date 2012, up 72 percent from the same period last year, according to Dealogic.
- Lastly, UPS would not have any trouble getting the transaction approved. The three large TNT shareholders control about 40 percent of the stock, and each of them is looking for an exit strategy. Second, while there are likely some market share and competition concerns, recent transactions in the European airline sector prove that these transactions can get done.
"In our view, this is an interesting transaction and a surprising one. We admit to being skeptical that an acquisition of TNT by one of the U.S. parcel companies was unlikely. However, now that TNT separated from the mail operation, the deal looks reasonable from an integration standpoint and the valuation is acceptable," the analyst noted.