May 4, 2012 / 1:46 PM / 6 years ago

TEXT-S&P keeps UPS ratings on watch negative

Overview	
     -- United Parcel Service (UPS) has announced its financing plan for its 	
proposed acquisition of TNT Express N.V. It also announced that it expects to 	
spend $1.5 billion on share repurchases in both 2012 and 2013. 	
     -- We are keeping our ratings on UPS on CreditWatch with negative 	
implications, where we had placed them after UPS first announced the 	
acquisition plan.	
     -- We are also evaluating UPS' exposure to multiemployer pension plans 	
(MEPPs). This liability, which we view as a debt equivalent, has increased as 	
a result of record low interest rates and low asset returns. 	
     -- Based on an evaluation of the company's proposed transaction 	
financing, share repurchase plans, MEPP exposure, and TNT Express integration 	
plan, we believe a downgrade would be limited to one notch.	
	
Rating Action	
On May 4, 2012, Standard & Poor's Ratings Services said that its ratings on 	
United Parcel Service Inc. (UPS) remain on CreditWatch with negative 	
implications, where we had placed them on Feb. 17, 2012. 	
	
Rationale	
UPS announced on May 3, 2012, that it plans to finance the TNT Express 	
transaction with $5 billion of cash and $1.8 billion of debt. It also 	
announced that it plans to repurchase $1.5 billion of shares in both 2012 and 	
2013. UPS announced on March 19, 2012, that it had reached an agreement to 	
acquire TNT Express N.V. (BBB+/Watch Pos/A-2) for EUR9.50 per share in cash, or 	
an estimated $6.77 billion. We originally placed our UPS ratings on 	
CreditWatch with negative implications on Feb. 17, 2012, after UPS 	
acknowledged that it had made a proposal to acquire TNT Express for EUR9 per 	
share in cash. TNT Express rejected the initial proposal but subsequently 	
agreed to the sweetened deal. 	
	
UPS originally announced that it planned to finance the acquisition with $3 	
billion of cash and to use debt to finance the rest. It has revised that plan 	
and now expects to use $5 billion of cash and $1.8 billion of debt to fund the 	
transaction. At the time it announced the deal, UPS stated that it expects 	
EUR400 million-EUR550 million ($525 million-$725 million) in annual run rate 	
savings after year four, but will spend EUR1 billion ($1.31 billion) to achieve 	
those synergies. 	
	
We believe the transaction will enhance UPS' business profile by bolstering 	
its position in Europe and providing it with growth opportunities in other 	
international markets where it currently has limited presence. However, the 	
transaction will initially cause a deterioration in credit metrics. UPS' 	
financial profile has also been weakened somewhat by multiemployer pension 	
plans, which have become more of a potential burden. Still, based on our 	
current understanding of the economics of the deal, we believe any downgrade 	
likely would be limited to one notch. 	
	
UPS is the world's largest package delivery company, with a significant 	
presence in all major global markets. TNT Express is a smaller package 	
delivery company that generates the majority of its revenues in Europe. TNT 	
Express was spun off from TNT N.V. (now PostNL N.V.) in June 2011. The 	
combined entity would generate annual revenues of more than $60 billion. The 	
deal is subject to various approvals, including regulatory approval and 	
shareholder approval. PostNL N.V. holds approximately 29.8% of the shares of 	
TNT Express and has committed to supporting the transaction. 	
	
CreditWatch	
Standard & Poor's will monitor the regulatory and shareholder approval process 	
and will resolve the CreditWatch once the transaction's terms and conditions 	
are finalized. Any negative rating action likely would be limited to one 	
notch, based on the company's proposed transaction financing, TNT Express 	
integration plan, share repurchase plans, and multiemployer pension plan 	
exposure. Although UPS does not expect the deal to close until the third 	
quarter of 2012, we may provide indicative ratings before then, based on an 	
assumption that the transaction goes forward as proposed.  	
	
Related Criteria And Research	
     -- What's Driving Standard & Poor's Ratings On United Parcel Service 	
(CreditMatters TV), March 22, 2012	
     -- Research Update: United Parcel Service 'AA-' Ratings Remain On 	
CreditWatch Negative On The Company's Agreement To Acquire TNT Express, March 	
19, 2012	
     -- Research Update: UPS 'AA-/A-1+' Ratings Placed On Watch Negative After 	
Announcing Proposed Acquisition Of TNT Express N.V., Feb. 17, 2012	
     -- Will Mounting Funding Pressures On Multiemployer Pension Plans Hurt 	
Issuers' Credit Quality?, June 9, 2009	
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008	
     -- Standard & Poor's Approach to Analyzing Employers' Participation in 	
U.S. Multi-Employer Pension Plans, May 30, 2006	
	
Ratings List	
	
Ratings Remaining On CreditWatch	
United Parcel Service Inc.	
 Corporate credit rating             AA-/Watch Neg/A-1+	
 Senior unsecured                    AA-/Watch Neg	
 Commercial paper                    A-1+/Watch Neg	
	
United Parcel Service of America Inc.	
 Corporate credit rating             AA-/Watch Neg/A-1+	
 Senior unsecured                    AA-/Watch Neg	
	
Complete ratings information is available to subscribers of RatingsDirect on 	
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 	
by this rating action can be found on Standard & Poor's public Web site at 	
www.standardandpoors.com. Use the Ratings search box located in the left 	
column.

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