FedEx has made a full cash offer of US$4.8bn/€4.4bn for TNT, a bid that represents a 33% premium over the share price and is not that far away from the price of US$6.6bn that UPS offered in 2012. Such a bold offer suggests that Memphis thinks that there is significant growth in the markets that TNT serves.
Looking at the recent results of TNT it is hard to see why. Revenue has fallen over 7% since 2011 whilst the company’s profit margins have been no higher than 2.25%, with 2014 seeing a loss.
The reason behind this performance has been the miserable state of TNT’s markets.
TNT is focused on the ‘business to business’ express sector in Europe which has suffered badly from the depressed economic climate. Its problems are both structural and cyclical, with many national markets either depressed or ferociously competitive. TNT does have intercontinental business which is growing, however it’s a small player in a big and tough market.
One of TNT’s issues is its strange positioning. Growth in the ‘business-to-consumer’ segment has been extraordinarily strong, driven by internet retailing. Yet TNT has failed to exploit this market because it simply does not have the systems in-place to provide ‘last-mile’ solutions. This is not entirely a bad thing. Last mile delivery can be savagely competitive and the players in the market are increasingly being squeezed by big customers such as Amazon who also have their own logistics capabilities. For the purposes of comparison the successful response of DHL Express was to withdraw from many of the more low-profit activities in ‘business-to-consumer’ and concentrate on high-margin inter-continental air-express services. TNT has not been so agile.
Its strategy for five years has been to adapt to lower demand in the ‘B2B’ market by providing a lower cost service. This has meant focussing on higher utilisation of assets with the corollary that service intensity for customers has declined. So far this has not worked with demand for the sorts of predominantly road-based next day services that TNT sells remaining flat.
To be fair to TNT’s management, a lot of this lack of growth is due to the state of the economies in many European nations, although it has also found the going tough in healthy economies such as Germany and the UK. Even if this does constitute mitigating circumstances it does not change the implication that TNT is in the wrong market.
So why is FedEx spending so much on this investment? It has to be assumed that FedEx is keen not to be left behind in the race between the ‘Big Three’ to become a truly global provider. To that end it has been investing on a small-scale in a number of European markets, however, the possession of TNT would transform its position altogether. The deal should enable it to construct a global network linking Europe, China and medium sized markets such as the Middle East, India and beyond.
Certainly FedEx was not happy about the prospect of UPS buying TNT three years ago and appeared to see such a prospect as a major threat. It lobbied hard to get across the point that a combined TNT and UPS would have very large market-shares in certain markets. Whether the EU competition regulators actually understood the nature and state of the market was unclear, however the deal still fell through. Now FedEx is doing the buying, no-doubt justifying the competition aspects purchase by pointing to its weaker presence in Europe. Yet it is hard to see FedEx being interested in the existing business of TNT and it is unlikely that it expects the purchase to generate quick returns. Rather it would appear that the company has made the purchase for strategic reasons, after all FedEx needs to remain in the game of constructing global networks and TNT is a platform to help do this.
To find out more about the global express market and for more information on the parties concerned with this deal please take a look at Ti’s and Global Express and Small Parcels report.