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January 14, 2013 8:42 pm
When UPS bid to take over TNT Express last February, following years of on-off courtship, it represented a bold bet to bolster the US delivery group’s position in Europe and outflank its arch-rival FedEx. UPS expected regulators to pose no hurdle to the €5.2bn ($6.9bn) deal.
Brussels, in the event, proved the deal-breaker. Far from giving its early blessing, the European Commission raised deep-set antitrust concerns over the express delivery market, concerns UPS was struggling to overcome. On Monday morning, the world’s biggest delivery group gave up trying.
The announcement – which puts paid to hopes of the deal going through even before Brussels formally vetoed the takeover – stunned not just the gaggle of hedge funds betting on every twist and turn of this deal. Even the commission was surprised to see UPS in effect pull out. TNT shares almost halved in value.
But the warning signs were flashing for some time, arguably as far back as when the takeover was being plotted. A few weeks before UPS launched its first TNT bid, Brussels flexed its muscles and halted the Deutsche Börse-NYSE exchanges tie-up in its tracks. It was perhaps an inauspicious moment for another US corporate champion to gamble at winning over Europe’s top competition authority.
The collapse of the deal has clear implications for the world’s four big delivery companies – the so-called integrators – not least in upending UPS’s strategy in Europe, forcing TNT into another commercial struggle to survive and leaving FedEx with new incentives to expand.
But it may have wider resonance, giving another regulatory check to the ambitions of US dealmakers in Europe. Given that the takeover was hatched during the eurozone’s sovereign debt crisis – as investor confidence in Europe plumbed new lows – there was naturally some bafflement from the UPS-TNT side.
As one participant put it as the deal began to hit trouble: “It is hard to understand why they wouldn’t want our money.”
Joaquín Almunia, EU competition commissioner, was blunt about his concerns: that the elimination of TNT would leave just two or three so-called integrators – combining land and air transport – in many European national markets, which risked hurting consumers through higher prices and less choice.
UPS attempted to address this by offering France’s DPD a host of assets and space on its aircraft to allow it to fill the commercial gap. But shortcomings in DPD’s capabilities – most notably in having to rely on buying space on the UPS airline – were a serious worry for Brussels. Mr Almunia memorably said global delivery companies could not rely on “horses”.
The final straw came on Friday when UPS was told there was unlikely to be an extension for it to find agreement with DPD, an agreement that would be a condition of closing the TNT merger.
UPS was warned months ago that finding a solution to the competition issues would be difficult, according to people involved in the talks. At first the strategy was to broaden the commission’s relatively narrow view of the express delivery market; then it moved to selling assets to create a new competitor in DPD.
“There wasn’t really anything else that they could easily offer,” said one person close to the talks. Others question whether UPS adapted early enough to the reality in Brussels; its concessions were submitted at the last possible point in the process, squeezing the amount of time it had to find a buyer.
Failing to win approval to purchase the prized assets of TNT means UPS has been robbed of an opportunity to expand rapidly in the world’s second-biggest delivery market. David Vernon of Bernstein Research said that while the acquisition was a “unique opportunity”, it will represent only a “modest negative” for UPS.
While UPS will be forced to trim its ambitions and lose its aggressive growth options in Europe, shareholders may see the upside. Some had worried about the integration risks of melding together the UPS and TNT networks. The decision also frees up cash. “That would now be available for shareholders, one would think,” said Mr Vernon.
As ever, there will be concern in UPS’s Atlanta headquarters over its nemesis FedEx benefiting from the decision and swooping in to seize TNT assets for a song. Indeed, FedEx’s strong objections over the harm to competition from the UPS-TNT deal was a factor in UPS’s Brussels woes.
But while FedEx has long eyed TNT, there are some indications that it may not be interested; FedEx never offered a counterbid for TNT, its financial position is not as strong as UPS’s and it turned down opportunities to pick up TNT assets during the merger clearance process.
As well as FedEx, some speculate that DPD could also return as a potential buyer. But TNT is not holding its breath. “FedEx has not expressed an interest” in an acquisition, said Bernard Bot, TNT Express’s acting chief executive. “We are focusing on executing our standalone strategy.”
Hedge fund managers who backed a clearance will also be licking their wounds. Many piled into the Dutch logistics company over the past year, underestimating the level of resistance in Brussels. One described the result as a “disaster”.
Another person close to the deal said that with no other big deals to arbitrage besides Glencore-Xstrata in Europe, the hedge funds “went nuts for” TNT-UPS, hiring many law firms and even one that went as far as “posting a lot of packages to achieve ... I don't know what.”
Additional reporting by Chris Bryant in Frankfurt
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