FedEx (NYSE:FDX) is one of the biggest global transportation companies. However, compared to its top rival, United Parcel Service (NYSE:UPS), it has one key shortcoming: a small European road delivery network.
FedEx hopes to close that gap with UPS by acquiring Dutch package delivery firm TNT Express. Pulling off a big merger like this typically involves jumping through a lot of regulatory hoops, but FedEx is now well on the way to completing that process.
FedEx looks to succeed where UPS failed
TNT has struggled to turn a profit for some time. For example, through the first nine months of 2015, the company has produced a meager adjusted operating margin of 1.1%. Including special items, it has lost money this year -- as was also the case last year.
However, TNT has strategic value to larger package delivery companies due to its solid position in Europe. Just a few years ago, UPS tried to purchase TNT. Its plans were foiled by objections from regulators at the European Commission, though.
FedEx has been hoping that its smaller footprint in Europe will allow it to avoid the same problem. Whereas UPS has the second largest market share in the European express delivery market, TNT and FedEx are No. 3 and No. 4, respectively. Their combined market share would be about 22%, which would still be less than DHL and UPS at 41% and 25%, respectively, based on a market share analysis from DHL.
Either a UPS-TNT merger or a FedEx-TNT merger would reduce the competitive landscape from four to three major players in Europe. UPS is sure to use that fact to argue that if regulators wouldn't allow it to merge with TNT, they shouldn't allow FedEx to merge with TNT, either.
So far, that argument hasn't gone very far. Last month, FedEx and TNT announced that the European Commission had informed them that it will not object to the merger. The decision won't become official until January, but it seems that the European Commission is OK with having only three competitors as long as they all have enough scale to compete effectively.
Getting close to final approval
Last week, FedEx got another key regulatory approval. The U.S. Federal Trade Commission gave FedEx the go-ahead to buy TNT. This move was expected, as TNT does not have a big presence in the U.S. today.
With both European and U.S. regulators on board, it now seems very unlikely that the FedEx-TNT deal will fall apart. The two companies have previously stated that they expect the merger to close in the first half of 2016.
It will take several years and significant effort on FedEx's part to successfully integrate the two companies. The upside is substantial, though. Combining FedEx and TNT could produce both cost synergies (by eliminating duplicative functions) and revenue synergies (by using the combined strength of the two delivery networks across the world to win more business).
Closing the gap with UPS
In its most recent fiscal year, FedEx generated revenue of $47.5 billion. UPS is somewhat larger, with annual revenue of $58.2 billion in 2014. Adding TNT's more than $7 billion in annual revenue will put FedEx nearly on par with UPS by that metric.
However, UPS' market cap is twice that of FedEx, due to its typically higher profit margin. To close that gap, FedEx has implemented cost cuts across the company, most notably at the FedEx Express division, where it has reduced its head count and retired older, inefficient planes.
Acquiring TNT could be another major step along the way to matching UPS in terms of earnings and market capitalization. By adding a big European road network to its strong position in the U.S. and East Asia, FedEx will become even more of a force in the global logistics business.
Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends FedEx and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.