According to the plan, the entire deal is set to be accomplished by the end of September this year, should regulators give the green light. If so, it will be a completely new ball game for the industry with the global express business dominated by only three competitors – DHL, UPS and FedEx. By adding Dutch TNT Express to its portfolio, ‘Big Brown’ not only inherits a massive European road network and some 480,000 staff, but also gets a significant air cargo capacity boost by taking over 44 freighters operated by TNT, if not deciding selling at least some of them.
But perhaps most importantly, the move fills in the long-existing white spot in UPS’ global network through absorbing the package firm’s wide-spread European road feeder services (RFS). This acquisition “will further expand UPS’ portfolio of solutions and geographic footprint. The complementary strengths of both organisations will create a customerfocused global platform and a leader in the logistics industry,” UPS said.
The takeover also follows a flurry of recent European expansion by UPS. The company is expanding its European air hub in Cologne, Germany and it recently acquired Belgium-based Kiala, which provides a platform that allows e-commerce retailers to deliver goods to a retail location for pickup. In 2011 UPS also acquired Italian pharmaceutical logistics company Pieffe Group.
But in this latest move it is the road feeder service portion that is of key value and long coveted by UPS, well demonstrated some years ago when the integrator placed a financially lucrative,
but ultimately fruitless bid for taking over forwarding agent Schenker. However, this approach was unsuccessful with railway heavyweight Deutsche Bahn outbidding UPS and winning the race.
With Schenker gone not many players were left that operated a wide-spread and dense trucking network in Europe for door-door feeder services to satisfy the appetite of UPS or FedEx for growth outside their traditional North American home market – except of course for TNT Express.
Offering a strong and tightly knit linehaul network between Finland and Sicily, the UK and Slovakia TNT has a large fleet of courier vehicles and an equally formidable fleet of regional cargo planes, especially BAe 146 freighters. This is a key reason why FedEx also threw its hat in the ring according to market analysts, but lost out to rival UPS.
Now with TNT gone no major road feeder is left in Europe for FedEx to cover the market from beginning to end. The only exceptions are some local firms like Opek in Poland that the US package carrier purchased on 5 April.
Opek runs 44 stations nationwide and is consolidating its transports in Lomianki near Warsaw. And while from a local/ regional perspective this might be a reasonable move, Opek is only a marginal player in the greater European market. But clearly this type of acquisition in Europe is at least FedEx’s ‘plan B’ if not its ‘plan A’ having made similar buys in the UK (ANC Holdings) in 2006 and Flying Cargo Hungary in 2007.
And just two weeks after its purchase of Opek, FedEx announced plans to acquire French express company TATEX. With annual sales of about 150 million euro, TATEX has an extensive ground network in France with a hub near Paris and a specialisation in high tech, spare parts,
automotive and clothing shipments.
Opportune timing
But for UPS it was an opportune situation. The Dutch Post’s packageshipping subsidiary TNT was too small a contender to stand on its own feet for long, never mind talking about gaining additional market share in the rapid growth countries of Asia or South America.
The Hoofddorp-based integrator reported revenue of €7.25 billion in 2011, with two thirds of this sum contributed by the European market, TNT’s only financial stronghold. No wonder that ever since parent Dutch Post decided in August 2010 to fully separate its postal and express divisions by forming two independently acting business units rumors gained increasing ground that TNT Express would be a candidate to be taken over sooner or later by one of its major global competitors, either UPS or FedEx. DHL did not qualify because a merger with TNT Express would have been failed to be approved by the EU regulator in Brussels due to the dominance of an integrated express player based within the Union. Indeed DHL showed little interest in the acquisition with DHL Express chief executive Ken Allen saying: “At the moment, I would rather swallow razor blades than take over larger competitors.
This phase is behind us. We prefer to grow organically – in a very controlled manner,” he told German newspaper Handelsblatt.
With one potential candidate out UPS took the chance to get into the game by offering the stakeholders €9.50 per share in an attempt to cement its position as leading integrator. The moment couldn’t have been much better for this offer since TNT Express’ shares were on a
downward trend for months due to slack business. Meanwhile the management even announced short work to stabilise the situation and stop the drain of cash. Now with the die being cast and
TNT Express added to the Atlantaheadquartered US package giant’s portfolio, UPS rounds up its global footprint and is finally on eye level with arch rival DHL Express right on the Deutsche Post logistics pillar’s home European backyard.
Asked whether DHL had missed an opportunity by not participating in the TNT sale, Allen said: “Absolutely not. I find it hard to understand why one would invest such a big sum … in a loss-making company. UPS needs significant synergies, about €400-500 million, to make it work.” “If you look at TNT, you will realise that the company is facing many problems outside of Europe. Meanwhile, the company’s earnings in Europe have clearly dropped in the last few quarters. In short, I do not see why the acquisition should give UPS any significant advantage,” Allen added.
Combined, UPS and TNT have a market share of 39 per cent on express shipments sent from or destined to Europe, while DHL accounts for 38 per cent. However, “these are statistics that do not necessarily survive the weeks or months to come,” argues Horst Manner- Romberg, a leading Hamburg-based express market analyst. He points out that some major customers that have deliberately chosen TNT as their shipping partner may sooner or later switch over to DHL, FedEx or even a smaller contender to avoid doing business with UPS. “The express and package market will be realigned,” Manner-Romberg predicts.
Synchronicity
As to which player profits most from the new array in the express industry, this question might be evaluated only as early as 2015 the analyst stresses, because it will take UPS three or four years to integrate TNT and synchronise all operations, as a number of major mergers in the past
have proven, he says. This time frame is confirmed by UPS’ chief executive, Scott Davis who speaks of €1 billion additional costs for ensuring clients receiving good services by the merged enterprise. Despite these announcements the takeover made public 19 March brought up many questions that even weeks after the step was officially advertised still lack any answer by the management. One is if TNT will be allowed to keep doing business as an own entity, including using its brand name and displaying its distinctive orange colors coated on vehicles, buildings,
aircraft, and shown on the uniforms of the employees.
This latter topic should not be underestimated since many staff deduce emotional allegiance to their employer proudly wearing an orange outfit when delivering parcels to customers. Nothing will change in the ne
ar future UPS officials keep reassuring. Up to now, however, all enterprises that the package giant has swallowed in the past lost their names very fast and had to accept the brown color as visual trade mark. Another open issue is, if the different cultures both enterprises have developed over a long period can be knit together smoothly to become one. Manner- Romberg is skeptical and warns that many mergers in the past have shown how sensitive and often complicated this process is with a substantial number of leading managers feeling pushed aside by the new majority owner and hence quitting their long-term employer. This massive loss of expertise is often hard to compensate – if ever, the analyst stresses. Further unresolved is a controversially debated operational topic concerning the future deployment of TNT’s freighter fleet. Currently all aircraft are based in Liège, the French-speaking region of Wallonia in Belgium. There, the integrator accounts for roughly 45 per cent of the entire air traffic. The airport offers 24/7/365 service and excellent freeway access for trucks or courier vehicles. However, UPS’s European hub is Cologne/Bonn airport where the integrator links its intercontinental flights and operates one of its most modern and efficient distribution centres worldwide. Only recently UPS announced plans to enlarge this facility by investing additional €145 million and creating 200 new jobs at the hub.
When the project will be ready in 2013 up to 190,000 packages can be sorted each hour, 80,000 more than today. So it’s no wonder that Daniel Brutto, helm of UPS’s international division, indicated that from TNT Express’s home airport Liège some business might be shifted to Cologne/ Bonn, mainly the intercontinental flights. “Cologne is the future for our airline business,” the manager told the media. And speaking of the synergies Kurt Kuehn, UPS’s chief financial officer said that the biggest single savings would come from a harmonising of the two enterprises’ air operations. Very nebulous remains also the product strategy. “As merged company “we have complementary products,” CEO Davis said. As to whether there will be a common name and service standard for the different offerings he left up to further speculation.
Having said this it seems doubtful if the merger will be executed as smoothly and non-disruptive as expected by UPS’s top management. Besides many unresolved questions there are a number of major stumbling blocks that could if not derail, at least obstruct the entire process
of knitting together both enterprises to become one.
In the first place are the competition authorities that could conclude that the deal will substantially attenuate competition in an industry that is characterised by very rapid consolidation processes. Hence, the regulator might demand breaking off some of UPS/TNT’s
joint businesses or sell valuable assets to its competitors. Basically not fully excluded can be that the entire project will be buried by Brussels’ competition watchdogs. If this worst case scenario comes up UPS has guaranteed TNT Express a “reverse breakup fee” valuing €200 million which it would reimburse in case the intended merger should be torpedoed.
Challenges
According to market observers it is doubtful that the merger will be give the full okay by the authorities without major objections or constraints. They remind of the many discriminating judicial obstacles the US regulator set up to hinder DHL Express to conduct its business on their turf. “This was mainly the result of the subtle lobbying of Washington’s politicians exercised by both UPS and FedEx to stop a major global competitor from successfully setting foot on their
own home market,” the experts states.
Another danger could arise from protesting unionists that might call for strike action since many staff are highly worried fearing massive job losses as a consequence of the two company’s going together. Currently about 77,000 employees are working for TNT Express worldwide. “We are unable to fully prevent the merger but are influential and powerful enough to really hamper the deal, in case we feel this should be necessary,” threatened Egon Groen of Dutch union Bondgenoten in a statement to the press.
“Over years the TNT management told us that the enterprise has the best market perspective if it stays on its own without liaising with anybody. Now all of a sudden and out of the blue a merger
seems to be the better solution,” Groen says, adding that employees were not informed about any possible merger by the management.
Groen and his colleague’s doubts are based on announcements that the takeover will generate synergies of roughly €550 million per year after the businesses are realigned, CEO Davies of UPS told the press. The Bondgenoten members doubt that this amount will be solely achieved
by organic growth combined with a strict cost saving programme. They fear that a certain number of TNT employees will be sacked to better the financial balance. Again, “we haven’t been given any information so far if there will be any redundancies or not and if so, how many and when,” criticises Groen.
