UPS to Close TNT Buyout in 2013

The largest parcel delivery company, United Parcel Service Inc. ( UPS - Analyst Report ) foresees a delay in its mega acquisition, TNT Express. The company expects the deal to accomplish in early 2013 instead of its previous anticipation of fourth quarter this year.

The company also formally confirmed the extension of its public offer period for all the issued and outstanding common shares and American depositary shares of TNT Express till November 9, 2012.

The request for an extension of the European Commission review period for ten working days, to which United Parcel and TNT Express have given their mutual consent, on the acquisition of TNT Express, is the key reason for delaying the completion of the acquisition.

In an event where the current offer period lapses without receiving all the regulatory approvals, the company would request for an exemption from the Netherlands Authority for the Financial Markets (AFM) for the extension of the offer period. This implies that the initial offer will no longer be valid and shares tendered under the current offer will be withdrawn. However, shares that have been tendered but not withdrawn in the initial offer remain subject to the Offer.

In June, news surfaced that UPS is facing a detailed investigation into this deal. The regulators suggested that the takeover would likely reduce competition in the international parcel delivery market, thereby affecting the end users. It was also reported that the European Commission temporarily stopped its review process over the TNT acquisition.

Should the deal materialize, it would boost UPS’ footprint in Europe – particularly Britain, France, Germany and the Netherlands – consolidating its position as a global leader in the logistics industry with annual revenues of more than €45 billion ($60 billion). The transaction will further expand the company’s presence in Asia and Latin Americaby providing an edge over its rival FedEx Corporation ( FDX - Analyst Report ) .

The combined company will generate about 36% of revenues outside the U.S., up from the current 26%. UPS projects the transaction to be earnings accretive in the first year and to generate pre-tax cost synergies of €400 millionto €550 million ($525 million – $725 million) by the end of the fourth year after completion (i.e. 2015). Furthermore, UPS intends to deliver a return on invested capital of at least 25% by 2014 upon the successful integration of TNT.

However, the company will incur a one-time pre-tax cost of a billion euros or more than a billion dollars to integrate the operations of both the companies over the next four years. Additionally, the fruitful integration of employees and operations remains a risk to the company. Furthermore, UPS has to pay €200 million to TNT in an event of termination of the deal.

In addition to TNT Express, UPS has been working overtime to expand its operations in Europe through smaller acquisitions. In February 2012, UPS announced the purchase of a Belgian e-commerce company, Kiala. In December 2011, the company acquired Italian pharma logistics provider Pieffe Group to enhance its position in North and South America, Europe and Asia.

We, currently, have a long-term Neutral rating on UPS. For the short term (1–3 months), the stock retains a Zacks #4 Rank (Sell).