United Parcel Service Inc. (UPS)’s $6.9 billion deal to buy out European competitor TNT Express was blocked by the European Commission on antitrust concerns Jan. 14. UPS has $8 billion in surplus cash it needs to invest.
The decision by the European Commission (EC), the regulator concerned with antitrust issues in Europe, is not yet final. However, the EC has informed UPS that it is working on a final decision to block the $6.9 billion deal initially announced in March 2012.
“We are extremely disappointed with the EC’s position. … The combined company would have been transformative for the logistics industry, bringing meaningful benefits to consumers and customers around the world, while supporting growth in Europe in particular,” said Scott Davis, UPS chairman and CEO.
The EC declined to comment on the issue and an official statement is expected in the next couple of weeks. According to research by Citigroup, the commission thwarted the deal because it saw threats to decreased competition.
The merger of UPS and Dutch TNT Express would have reduced the number of major logistics players in Europe from four to three. Currently there is DHL, UPS, FedEx, and TNT Express. According to Citi, FedEx is not big enough in Europe to compete meaningfully with DHL and a merged TNT and UPS.
In spite of proposals by UPS to remedy the EC’s concern, the deal ultimately could not go through.
Cancellation Has Major Repercussions
The cancellation of the merger has major repercussions for UPS and TNT alike.
UPS has to pay a cancellation fee of $267 million to TNT according to the original terms of the merger. This money is small change compared to the $8 billion in cash reserves the company has on its balance sheet. It will now have to look for a new way to invest the excess cash.
In terms of its size ($9.63 billion in sales) and structure, TNT Express would have been the perfect match for UPS to bolster its European operations, which are strong already. There is no other takeover target with the same characteristics, so UPS will likely grow organically or make smaller acquisitions.
As for the rest of the cash, Citigroup thinks that a share buyback is a good option. “We believe that UPS could use an incremental $4.7 billion ($5.0 billion of cash on hand was going to be used for financing the TNT deal) for the program, which could purchase nearly 60 million shares at current stock price levels, or 6.3 percent of shares outstanding.”
Such a move would boost earnings per shares and valuation metrics and could provide a significant return for shareholders. Shares finished trading up 1.69 percent and closed at $79.24 Jan 14.
TNT on the other hand is not so fortunate. The company does not have the means to grow on its own and overtake some of the bigger players such as UPS, FedEx, or DHL. It is heavily geared toward Europe, with the continent, the Middle East, and Africa contributing more than 60 percent of revenue. It has a good position in Asia, which is not big enough yet to drive the company.
Consequently, a bid by either UPS or FedEx was seen as a very good solution to enhance TNT Express’s operations and provide value for shareholders. When the UPS bid was first announced it propelled the share price to over 10 euros ($13). It had been trading as low as 5 euros ($6.50) some months before.
When the news hit that UPS had to cancel the deal, shares immediately dropped 41.3 percent to 4.84 euros ($6.40), wiping out $2.45 billion in market capitalization in seconds. Given that TNT management had been focusing on preparing for the merger, it now has to go back to the drawing board to convince shareholders it can compete by itself.
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