Earlier this year, FedEx (FDX +0.10%) announced plans to merge with Dutch package delivery rival TNT Express in order to expand its presence in Europe. Whereas FedEx has a big presence in the U.S., East Asia, and global air cargo, TNT has a strong road network in Europe, something that FedEx has been missing.
TNT's European road network will complement FedEx's air cargo strength.
Earlier this week, FedEx moved a step closer to closing the transaction as TNT shareholders voted to approve several resolutions that clear the path for the merger. However, the two companies still face one big hurdle -- they need to convince EU regulators that the merger will promote competition.
An important vote passes
In the tender offer FedEx submitted to acquire TNT, one key term was that at least 95% of TNT's shareholder base would have to accept the offer for the merger to go through. However, that threshold would be lowered to 80% if TNT's shareholder body approved several resolutions at a special meeting.
This meeting was held last Monday. Since TNT's shareholders approved all of the resolutions in favor of the merger, the deal can go through even if only 80% of the company's shares are tendered. That's a much easier hurdle, increasing the likelihood that the merger plan will garner the necessary support.
Will regulators approve?
FedEx and TNT have publicly claimed that the merger is clearly pro-competitive and therefore will not hit any regulatory snags. They reason that DHL and United Parcel Service have vastly higher shares of the European express delivery market, estimated at 41% and 25%, respectively by DHL (via The Wall Street Journal). By contrast, FedEx and TNT combined have only 22% market share.
Nevertheless, European regulators are seriously considering demanding concessions from FedEx as a condition of allowing the merger. While FedEx and TNT have touted the benefits of having three strong competitors rather than two strong ones and two weaker ones, the EU regulators may not agree with that logic.
FedEx and TNT only have two major competitors in Europe.
If the EU demands significant asset sales, that could become an obstacle to completing the merger. The key problem is that there aren't any other major competitors in the market that could buy whatever assets FedEx and TNT might be obliged to sell.
This merger is important to FedEx's long-term strategy
FedEx would probably be willing to make some concessions in order to keep the TNT deal on track because of the merger's strategic value. Combining TNT's road network with FedEx's global air shipping prowess could allow the merged company to win much more business in Europe.
It will probably take a while for those benefits to materialize, though. TNT recently issued a profit warning for the third quarter and it is very much a turnaround story. A TNT-FedEx merger could allow the combined company to better tap into rising European export volumes, but FedEx will need sustained demand growth to earn a good return on the purchase price.
In addition to the cost of acquiring TNT, FedEx may also need to invest a significant amount of capital to make up for deferred investment at financially troubled TNT. That adds to the expense of the deal.
Considering all of these factors, it's clear that FedEx wants to go through with the TNT merger in order to bolster its position in Europe. That said, it could take years for the merger to start making a meaningful contribution to FedEx's earnings. As a result, if EU regulators demand big concessions, that could be enough to make FedEx walk away.
