TNT Express Volume Down

In the 10 years TNT has been publicly traded on the Amsterdam Stock Exchange, it has seen many rumors, said Peter Bakker, CEO. It is the company policy, he said, never to comment on market rumors. And with that, he began the earnings announcements for the first half and dismissed any possibility of even a hint on the veracity of a rumor that FedEx was seeking to acquire TNT. Bakker said he was pleased with the results for the second quarter and the first half despite a substantial drop in Express volumes in June. The drop was the result of customers responding to high prices and shifting from premium air services to ground alternatives. In that, TNT's experience lags a trend already exhibited at FedEx and UPS in the US. But with Europe's largest road network, Bakker was satisfied TNT was well positioned to retain that traffic that was seeking lower cost alternatives by road. Road networks will be important to TNT's growth, said Bakker, recounting the company's position in emerging markets such as China, India, Brazil, the Middle East and Southeast Asia. In each case the company has built or is building a solid road network through acquisition, expansion and integration of those operations. China, India and Brazil are all now fully integrated into TNT's international network, said Bakker. In the Middle East, TNT is the only company connecting all countries, he pointed out. Asked about Iran, he noted that operation is handled by an independent agent and TNT was extending its Middle East Road Network to that agent. For those who were starved for a major announcement, Bakker offered only a statement that TNT would embark on a major cost cutting program for Express. It will optimize its network over the next 18 months and consider, in that process, whether portions of the air network are being replaced by road services. It will also pursue lean operations in hubs and depots. TNT reported overall growth for the group of 7.5% for the second quarter. Express operational revenue grew 10.7% and core volume was up 6.9%. The sharp volume decline in June was recovering somewhat in July. The lag in recovering higher fuel costs during the quarter cost the Express group an estimated €7 million ($11 million).Mail showed operational revenue growth of 15.6%. TNT expects its full-year 2008 results to come in at the low end of its expected range. Express cost savings targeted at €100-€125 million are expected to be fully realized by 2010. And, TNT expects to generate €300-€400 million from real estate sales and working capital by the end of 2009.

FedEx Rumored In TNT Buy

“No comment” is the rule, but that's no denial that FedEx may be in the market to acquire global express carrier TNT. Here's why the rumor seems likely to be true. TNT has been conducting an aggressive stock buyback program. At the same time, it was streamlining the organization into a lean, mail and express company with strong road networks supporting it in developing markets. In a sense, it looks very much like the core FedEx Express operation.

Asked repeatedly about the North American market, Marie-Christine Lombard, group managing director of express at TNT, said they had no interest in expanding in territories other than developing markets. She told Outsourced Logistics essentially that TNT had no desire to try to win market share in a market that was already dominated by major competitors. TNT would prefer to be the number one express carrier in the markets where it competes. That said, TNT was not abandoning the North American market and Lombard said it would continue to provide access to North America and provide North American customers ready access to its global network.

TNT has strong planning, modeling and optimization tools that have allowed it to enhance the performance of its global express network. Its recently announced Liege/Singapore/Shanghai air service is an example. TNT was able to determine that adding Singapore to the Liege/Shanghai lane would significantly improve the balance in the Europe/Asia lane.

Also to its advantage, TNT has adopted an express-service strategy that drives its road networks to perform as part of an express operation, not like a traditional less-than-truckload (LTL) operation. This means scheduled departures vs. holding trailers until full. Its recent acquisitions are either top express companies in their regions or LTL operations TNT will recast into express feeder operations.

FedEx recently announced a planned expansion of a European hub with a potential rail connection for parcels. That facility could complement TNT's Liege hub (which concentrates some of its operations previously handled at other European airports). FedEx could then access the already ubiquitous TNT road network for pick up and delivery on international shipments and it wouldn't have to compete with TNT for intra-European parcel and freight business-which should provide some instant cost savings and efficiency improvements.

The TNT ground network in China and its road network in Southeast Asia (connecting with southern China) would also be a plus for FedEx and complement much of the network it already has in the region. The “emerging markets” strategy of TNT would also help FedEx avoid costly investments to compete against an established carrier in those regions. Instead, it could provide moderate investments to continue to grow and upgrade the existing or developing TNT networks.

The deal, if there is in fact a deal pending, would not be without potential barriers. Perhaps the biggest is the value of the US dollar. That adds a significant premium to any cash deal FedEx would make.

Board and shareholder approvals would be needed at both companies, and though the Dutch government no longer holds its special share in TNT, the Stichting Bescherming TNT (Foundation Protection TNT) was formed to “care for TNT's interests, the enterprises connected with TNT and all interested parties, such as shareholders and employees, by, among other things, preventing as much as possible influences which would threaten TNT's continuity, independence and identity contrary to such interests.” According to TNT, the Foundation is an independent legal entity and is not owned or controlled by any other legal person. That is, it is independent, including being independent of TNT control. So, there is still a potential “poison pill” defense should shareholders feel any offer forthcoming from FedEx is inadequate.

Labor is always a concern, and TNT has recently concluded talks with a number of its unions. In the US, FedEx is facing some challenges, and groups like the International Brotherhood of Teamsters (IBT) could mount a vocal opposition, but may not be able to influence the outcome of any acquisition talks.

Since this is only a rumor, the facts could be skewed, and it may not be FedEx that is seeking to acquire TNT. The other likely contender is UPS, but it just got a boost from a proposed $1 billion-per-year contract to handle domestic air lift for DHL Americas. It would seem unlikely that DHL parent Deutsche Post World Net (DPWN) would stand still while UPS uses its money to go into competition with it in its home market in Europe. In fact, the DHL deal with UPS could have been the break FedEx was waiting for to make a move for TNT.

Regulators would have to weigh in on the deal, and the potential for concern would appear to be at the European Commission, not in the US. With DPWN still a strong player in Europe, it would not appear a FedEx acquisition would be anti-competitive. There might be initial questions about foreign ownership of a company that maintains an air fleet or over the contracts to operate postal services in Europe. Any official announcement would likely address those issues. (I.e. Deutsche Post set up ABX as the owner of the airline operations of Airborne Express to forestall problems with US limits on foreign ownership/control of a US airline.)

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