By Sara Webb and Anthony Deutsch
AMSTERDAM Jan 14 (Reuters) - United Parcel Service Inc said it would drop its 5.2 billion euro ($7 billion) bid for Dutch delivery firm TNT Express on the expectation of an EU veto, a sharp blow that halved the value of TNT's shares within minutes.
U.S.-based UPS, the world's No. 1 package delivery company, had sought to buy the Dutch firm to gain access to its European network and business in fast-growing Asia and Latin America.
The collapse of the deal is particularly damaging for TNT Express, which has struggled to turn around in a weak European market and will have trouble regaining market share, believed to have been eroded during the talks with UPS. The plunge in its share price wiped more than 2 billion euros off its value.
UPS would also have to adjust to the loss of opportunity, said Philip Scholte at Rabobank: "This is going to make it hard for UPS to increase its position in Europe on its own."
UPS and TNT Express said the European Commission, the EU's executive body, had told the two firms it was working on a decision to prohibit the proposed acquisition, leaving them no choice but to abandon it.
"UPS will pay TNT a termination fee in the amount of 200 million euros and will withdraw the offer," once the formal decision is taken, UPS said on Monday.
The European Commission declined to comment. EC competition policy spokesman Antoine Colombani said the decision would be taken in "due time" with a deadline of Feb. 5.
TNT Express has been forced to cut capacity in Europe in response to falling demand, was hit by restructuring problems in Brazil, and is considered a minor player in China. Its chief executive quit soon after UPS made its offer.
TNT Express shares fell to 4.051 euro, compared with the UPS offer price of 9.50 euro per share.
"This is a big disappointment of course. The market had discounted the shares slightly below the offer price, but everyone had thought they would be able to work something out in the end," said Rabobank's Scholte.
After focusing on the deal for nearly a year, TNT Express will have to find a new chief executive and set out a new business strategy. The deal had initially been expected to close in the third quarter of 2012.
"Now TNT will have to continue alone. TNT's management will have to roll up their sleeves, come up with a plan and get down to work," Scholte said. TNT Express said it would give an update on its strategy in due course.
A new merger seems unlikely, at least in the short term. Its closest European rival, Deutsche Post's DHL is bigger in Europe and would be unlikely to get European approval for an acquisition.
"America's FedEX is the only other option and they are not going to be in any hurry because there is simply no rival bid," said analyst Maarten Bakker of ABN Amro.
The U.S. delivery company had offered various concessions in a bid to win EU regulatory approval for its bid, including a proposal to sell warehouses and customer bases in about 15 countries, mainly in eastern Europe.
"We proposed significant and tangible remedies designed to address the EC's concerns with the transaction," Scott Davis, UPS chairman and chief executive said in a statement, expressing disappointment at the decision after months of talks.
"The combined company would have been transformative for the logistics industry, bringing meaningful benefits to consumers and customers around the world, while supporting growth in Europe in particular," Davis added.
Shares in PostNL, TNT's biggest shareholder which had been counting on using proceeds from the deal to pay investors a dividend, also plunged a third on the news.