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UPS-TNT Deal: The Good, The Bad

 March 20, 2012 03:33 PM

United Parcel Service, Inc. (NYSE:UPS) reached a deal to buy Netherlands-based TNT Express for $6.85 billion, creating a package and shipping giant in Europe generating estimated annual sales in excess of $59 billion. This deal cements UPS position as a leader in most of the markets it currently serves. At the same time, the combo allows material earnings growth as UPS sheds redundant costs in duplicate networks and enter new, faster growing markets.

TNT is the 4th largest express logistics and transportation company in the world, generating revenue of more than $9 billion in 2011. TNT's operations are mostly focused on the European market, but the company has sizable operations in the Asia Pacific and North and South America.

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Once the deal closes, UPS will be the largest express logistics and transportation company in the world. In buying TNT, UPS gains a significant presence in the European road freight market, which is an area the UPS has historically had remarkably little exposure.

TNT will also provide UPS greater exposure to the faster growing emerging markets in Latin America (mainly Brazil) and in Asia.

"We believe the most obvious benefit from this transaction will be the ability to eliminate redundant costs from the duplicate air and ground networks in all geographic regions," RBC Capital Markets analyst John Barnes wrote in a note to clients.

The deal is expected to be accretive to EPS in the first year, and the company will face higher interest and acquisition costs without much in the way of offsetting benefit.

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UPS believes it can extract $525 million to $725 million in pretax synergies by the end of year four. This is significant as TNT is only expected to generate pretax income of about $300 million in 2012.

This is probably the biggest deal UPS could do considering the lack of other sizable targets in the market. However, the acquisition doesn't move the earnings needle since Barnes expects it to contribute just 30 cents a share to  2017 earnings, which represents modest accretion.

The deal could also pose headline risks as the company tries to win approval from the various regulatory bodies and labor organizations. On a combined basis, UPS and TNT would have a 39 percent market share in Europe. This is roughly inline with DHL's current share, but higher than Fedex's 11 percent. But, these risks would be just speed bumps in the road.



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