Concern by European Union authorities about too much concentration of power in the parcel business should UPS be allowed to acquire TNT Express has increased the chance the deal could be scuttled, but two industry analysts this week expressed confidence the merger would still go through.
Last month, the European Commission delivered to UPS and TNT a laundry list of objections
to the $6.5 billion takeover detailing multiple countries where regulators believe FedEx and DHL may not be big enough to provide an adequate counterbalance, leaving consumers fewer choices for their parcel deliveries. The statement of objection has not been made public, but officials have expressed concern that the merger would reduce from four to three the number of global express delivery companies providing service across the economic federation.
UPS has argued that there are many smaller courier companies that provide adequate competition. It would overtake DHL as the largest express carrier in Europe if the TNT deal is finalized.
Unless Atlanta-based UPS can convince regulators in charge of competition policy that a tie-up with TNT would not harm consumers it will have to to divest, or not acquire, some local TNT operations. EU officials have publicly made clear that they expect UPS to make significant concessions to allay their concerns.
Ben Gordon, founder and managing director of BG Strategic Advisors, said at a major freight industry conference in Anaheim, Calif., that he still expected the deal to go through despite the regulatory hurdles.
UPS will probably have to shed a couple of TNT pieces, "but ultimately I think it will get done," he said when asked about the deal during a panel discussion on Tuesday.
Combining UPS and TNT will be good for shippers, he added, because UPS has proven to be a better operator than TNT. UPS officials say they will be able to pass on cost savings from the merger to consumers.
Last week, transportation analysts at the investment bank Stifel Nicolaus estimated the proposed UPS-TNT deal had about a one-third chance of being completed.
Gordon, who specializes in mergers and acquisitions for the logistics sector, said in many cases the concerns of regulators about a company having too much market share are unnecessary because markets tend to correct the situation through innovation.
"If the biggest buggy-whip manufacturers all merged to create a monopoly in the early 1900s and then the automotive industry took off, you wouldn't care about the buggy-whip industry," he told a small gathering of attendees at the joint meeting and expo of the National Industrial Transportation League and the Intermodal Association of North America.
Gordon and Mark Davis, senior research analyst and partner at the Cleveland Research Group, agreed that UPS would benefit from a truncated TNT network even though splitting off some of its assets would inhibit optimum efficiency.
TNT is stronger in its core European market and gives UPS the ability to lower operating costs by leveraging its existing ground, air and sortation-hub infrastructure, all of which creates a more complete global network for the world's largest parcel delivery company, Gordon said.
"UPS already has a pan-European service footprint. So, it may be a situation where they are not allowed to have as much of a presence in that market, but they're still in that market," Davis said. "And I think that the synergies created by taking their volume and TNT's volume across Europe overall will still be a huge operating benefit to them.
"It's a network business. So layering on all that additional volume from TNT - every incremental package makes UPS that much more efficient."
UPS ground and air presence across Europe means that even if it can't retain the entire TNT network it will still have the ability to serve all the relevant markets without any gaps, he said.
Separate from any regulatory review, TNT would also have to sell its airline because EU rules do not allow foreign companies to own and operate a European-based airline.
"I think it's highly unlikely that the regulators will block so much of the deal that it doesn't still make sense for UPS," Gordon said.
Stifel Nicolaus, in its analysis, questioned the value of the UPS-TNT deal. It said that TNT isn't strategically important because UPS already has solid operations in Europe and that UPS could beef up its business in China and Brazil without taking on TNT's money-losing operations there.
The European Union is expected to finish its review of the UPS-TNT transaction early next year. The companies face a Feb. 28 deadline from the Netherlands to finalize the deal. UPS is obligated to pay TNT a $225 million break-up fee if the deal falls through. - Eric Kulisch