For over a year, the world's largest express parcel deliverer, UPS (NYSE:UPS), has been pursuing a deal to acquire the world's fourth-largest -- and Europe's largest -- package courier, TNT Express (NASDAQOTH: TNTEY). The European Commission, the European Union's regulatory arm, threw up multiple barriers to the nearly $7 billion purchase. After UPS put out three different plans to address the commission's concerns, on Monday the global delivery giant announced it was abandoning the plan after commission official Joaquín Almunia indicated that his agency would not allow the acquisition to go through. In my eyes, this decision is bad for TNT Express, bad for UPS, and bad for Europe.
The logic of the deal was strong. TNT Express, which derives over half of its revenue from Europe, has been hit hard by the recession in that region, and its operating income has tumbled from a $1.6 billion profit in 2006 to a $150 million loss in 2011. Management has also been unstable and unfocused since former CEO Marie-Christine Lombard unexpectedly resigned in September, leaving an interim boss at the helm. The solid profitability, disciplined operations, and strong leadership of UPS would have helped compensate for these weaknesses.
For UPS, the company didn't just see opportunities to streamline European operations and cut costs out of the business in the face of a difficult pricing environment. UPS was also highly interested in TNT's emerging market operations. UPS is the world's largest package carrier, and more profitable than its direct competitors, but remains highly dependent on the U.S. market, which represents three quarters of sales.
TNT offered some attractive international assets. About a fifth of TNT's revenue comes from its South American business, with a particular strength in fast-growing Brazil, where TNT is a market leader. TNT has struggled to streamline its South American operation, but TNT's significant market share combined with UPS's operational excellence could have led to great things.
UPS has also been eager to break into the vital Chinese market, where it's behind close rival FedEx (NYSE:FDX). Both companies have extensive operations through joint ventures, though each desires exclusive control over its own delivery network. Currently, the Chinese government has given FedEx permission to deliver to just eight Chinese cities, while UPS has access to only five. TNT's wholly owned subsidiary Hoau is a minor player in the Chinese market, but with coverage of over 600 Chinese cities, it still would have been a nice addition to the UPS portfolio.
The European Union would also have benefited from the sale. Regulators' complained that the deal would have reduced the number of major integrated package shippers from four, comprised of UPS, FedEx, TNT, and Deutsche Post subsidiary DHL, to three. The European Commission wanted UPS basically to ensure that another courier would rise up to take TNT's place, and UPS offered a number of concessions, like selling off TNT's air business and operations in 16 different countries, aimed at allowing French courier DPD to compete more effectively. Ultimately, the European Commission found even these painful concessions unacceptable.
Their reasoning was that fewer major parcel couriers would hurt small businesses by leading to an increase in delivery prices, but I don't buy that for a second. While there may be only four major integrated parcel shippers, the European delivery landscape is chock-full of competitors thanks to the continent's multitude of state-sponsored multinational mail companies. While in the U.S., FedEx and UPS compete only with the United States Postal Service, in Europe private couriers are up against not only Deutsche Post and TNT, but France's La Poste, Britain's Royal Mail, Spain's Correos, and more than a dozen others.
Many of these services are supported by taxpayer subsidy rather than by revenue alone, which allows state couriers to cut prices dramatically and remain profitable. Therefore, price competition in Europe was already assured. European regulators didn't strike a blow for consumers in killing the UPS/TNT deal, they simply ensured that nearly $7 billion in foreign direct investment did not reach European shareholders and employees, and endangered the future of TNT, a European company employing nearly 80,000 people.
The path forward is clear for UPS, which will continue to pursue small tuck-in acquisitions and organic growth worldwide. As a UPS shareholder, I'm disappointed at the failure of the deal, but I'm not selling shares. TNT Express looks far less stable. Originally spun off from the Dutch postal service, TNT NV, in the hopes of getting bought out, TNT Express now looks bereft of a suitor. For the same reason that UPS was rebuffed, market leader Deutsche Post is unlikely to be able to pass regulatory muster. FedEx, with a smaller footprint in Europe, could probably snap up TNT, but that company has recently focused on cutting costs and expanding in emerging markets, and a Eurocentric courier would be an odd fit.
Indeed, FedEx is probably the company helped most by the week's developments. With no other buyers on the horizon for TNT Express, FedEx could offer a low price for the company and probably succeed. Otherwise, FedEx has denied its arch-rival an important win, as it had hoped when it originally filed the anti-competition complaint that ultimately led the European Commission to kill the deal.