August 11, 2008 / 8:50 PM / 12 years ago

TNT takeover talk: real deal or boy who cried wolf?

CHICAGO (Reuters) - In the world of package companies, there is one story you can rely on to come up with mind-numbing regularity: speculation that either United Parcel Service Inc (UPS.N) or FedEx Corp (FDX.N) are in talks to buy TNT NV TNT.AS.

A vehicle of Dutch TNT is seen in Haarlem August 11, 2008. REUTERS/Sander Koning/United Photos

The latest speculation that UPS is in talks to buy TNT for 10 billion euros ($15.2 billion) sent the Dutch mail company’s stock up more than 5 percent. A mid-July rumor that FedEx was doing the same sent TNT stock up nearly 30 percent in a single day. Ten days later, TNT’s stock fell 18 percent on a report that talks had ended.

While this talk almost invariably comes to naught - and both companies have consistently refused to comment on the recurrent rumors - some day TNT would make a good fit for UPS and an even better one for FedEx. TNT’s stock rises on rumors of an imminent bid because a deal is seen as a good long-term strategy for either company.

“The rumors come up every couple of months, and every time nothing happens,” said Jason Seidl, an analyst at investment bank Dahlman Rose. “The problem is that a deal makes sense, FedEx needs TNT, and UPS could use it, so that’s why TNT’s shares react.”

“Eventually, I am convinced there will be a deal, but in the meantime it’s like the little boy who cried wolf,” he said.

Most analysts greeted the latest episode in what Seidl termed the “TNT saga” with more than a dash of skepticism. They rolled out reasons why the Dutch company would be a good buy but also stressed that any announcement of a deal by UPS or FedEx would result in a bidding war.

“Recently, there has been increased press speculation about first FedEx and now UPS purchasing all of TNT or its Express division,” Edward Wolfe of Wolfe Research wrote in a note for clients. “We ... believe at this point there remains little evidence of such a deal occurring.”

Even if a deal is not in the works, stock moves on the back of rumors are suspicious, some analysts said.

“It is a little suspect that we get these persistent rumors from unknown sources that have such an impact” on TNT’s stock, said Dahlman Rose’s Seidl.


To understand the attraction of TNT to UPS or FedEx, one should look at its market share in Europe.

Some analysts put the Dutch mail company’s share at around 9 percent. Deutsche Post (DPWGn.DE) express delivery unit DHL has 15 percent market share, while the world’s largest delivery company UPS has 6 percent and FedEx has 2 percent.

As a relatively small fish in the European pond compared to its competitors, Memphis-based FedEx is seen by analysts as having the most to gain from buying TNT because that would make it the No. 2 operator on the continent.

“Speculation of a TNT takeout has persisted for years, so we hesitate to draw any conclusions,” R.W. Baird & Co analyst Jon Langenfeld wrote in a note for clients. “However, we believe the deal would be strategically positive for either FedEx or UPS.”

“We believe FedEx needs TNT more than UPS, but UPS could afford to pay more,” he wrote.

“The deal would be more strategically significant and more important for FedEx growth given its limited intra-European platform. However, the earnings synergy opportunities would be greater for UPS given its existing intra-European footprint,” Baird’s Langenfeld wrote.

“Either way, the deal would likely be a positive for the industry, representing yet another layer of consolidation going from four to three global integrators,” according to Langenfeld.

For some time, the prevailing theory among analysts has been that the worst case scenario for UPS or FedEx would be if one or the other got control of TNT and dramatically grew its European market share.

That would raise the possibility of bids and counter bids that would not be good for UPS and FedEx, but would be a bonanza for TNT shareholders.

“If either UPS or FedEx were to announce a deal to buy TNT (or TNT Express), we believe it would cause near-term pressure on both UPS and FedEx stocks due to concern about a potential bidding war and resulting high price for TNT,” JP Morgan analyst Thomas Wadewitz wrote in a research note.

All of the leading package delivery companies have been hurt by slowing global economic growth and high fuel costs, and customers switching to slower package services from higher cost express ones.

JP Morgan’s Wadewitz noted that “cyclical pressures on TNT may provide a catalyst for TNT to consider a deal.”

Whether or not a deal is in the offing, analysts said more speculation about one can be expected.

“Every few months we wake up to a new rumor and that is unlikely to change moving forward,” Dahlman Rose’s Seidl said. “What is worrisome is that we don’t know where these rumors are coming from and who stands to benefit from them.”

“At the same time I am concerned that if investors hear this often enough, eventually they’ll say, ‘Oh, that again’ and miss the real deal when it comes,” he added.

Editing by Toni Reinhold

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