By SAMANTHA BOMKAMP and TOBY STERLING, Associated Press
UPS is giving a vote of confidence to Europe with its $6.77 billion purchase of Dutch rival TNT Express, by far the company's biggest deal ever.
After weeks of negotiations, the world's largest package delivery company on Monday locked in a deal for Europe's No. 2 express mail company. Although TNT has struggled during the European financial crisis, it's a valuable prize that allows UPS to better compete with Germany's DHL. UPS will have between one-quarter and one-third of the vast European package delivery market, according to an analyst's estimate.
The deal also allows UPS to expand in growing markets such as Brazil, and comes at a time when business is picking up in the U.S. Before this, UPS' biggest acquisition was Overnite Transportation in 2005. It paid $1.25 billion for the company that later became UPS Freight.
UPS entered the European market with service to Germany in 1976 and has since acquired a number of smaller companies. UPS says the continent is ripe with opportunity, despite the current financial turmoil. It points to strong European exports and an express package market that's growing three times as fast as the overall economy. Businesses are also clamoring to become more efficient — a service UPS offers through its supply chain unit.
Stifel Nicolaus analyst David Ross expects that UPS and TNT together will have between 25 and 30 percent of the European small package market. The combined company will pass DHL in size. As UPS grows, consumers and businesses will likely pay more to ship packages because there will be less competition around the globe.
UPS currently gets about 26 percent of its sales from outside the U.S. That will grow to 36 percent with TNT. UPS hopes to further boost its international sales to 50 percent in the next five years.
JPMorgan analyst Thomas Wadewitz said the deal will launch UPS from a third-place position in most major European markets to first or second behind DHL. He upgraded UPS' stock to "Overweight" or "Buy," saying the TNT deal will provide a "significant catalyst to growth" in 2013 and 2014. UPS reported stronger-than-expected growth for the last three months of 2011.
UPS shares rose $3.30, or 4.2 percent, to $81.71 in afternoon trading.
The deal works out to $12.55 (€9.50) per share; 54 percent higher than TNT's closing price the day before the companies confirmed they were in talks.
UPS, which is based in Atlanta, has nearly 400,000 employees worldwide and will add about 75,000 from TNT. UPS had total sales of $53.11 billion last year; it expects to post annual sales with TNT of about $60 billion.
TNT has been struggling as European countries face slowing economic growth or slip into recession. TNT lost €173 million ($229 million) in the fourth quarter, mostly due to a charge in its Brazilian arm and the declining value of its airplane fleet. Revenue rose 2.8 percent to €1.85 billion ($2.5 billion).
TNT gives UPS access to a strong European road and rail network and more opportunities for small package, freight and other services. UPS will also be able to expand in countries and regions it says it currently underserves, including Brazil, Australia and the Middle East.
UPS will fund the deal through the $3 billion in its coffers and new debt offerings. It expects the deal to close this fall, but it will have to pass a number of regulatory hurdles before then.
UPS agreed to pay $264.1 million (€200 million) to TNT if the deal doesn't pass government antitrust scrutiny. And there's also a clause to protect UPS if TNT looks elsewhere for a partner. TNT, which was also considered a potential takeover target of FedEx Corp., can only accept another deal that's at least 8 percent higher. It also agreed to pay $66 million if it breaks off the deal with UPS. FedEx hasn't formally said it's interested in TNT.
The deal is expected to boost UPS' earnings within a year after it closes. By 2015, it expects savings to be $525 million to $725 million a year. UPS said it's too early to talk about possible job cuts. TNT's largest shareholder, Dutch postal company PostNL, said it will vote in favor of the deal. It holds a 29.9 percent stake.