EU regulators cause UPS to withdraw takeover bid

February 2013 | FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

Following months of negotiations, United Parcel Service Inc (UPS) abandoned its attempts to purchase Dutch rival TNT Express in January, after European antitrust regulators indicated they would not approve the deal on competition grounds. The $6.8bn purchase of TNT would have represented the largest acquisition in the 105 year history of UPS and created a merged company with estimated revenues in the region of $60bn. The American firm hoped to have completed the deal before the close of 2012, but before it could be finalised the merger ran afoul of the European Commission’s regulatory body.

The proposed merger was intended to help consolidate UPS’s European presence whilst simultaneously increasing the company’s foothold in emerging markets and stealing a march on rival firm FedEx. UPS, the world’s largest package delivery company, had courted its European competitor for a number of years before announcing its intention to purchase TNT in March 2012.

The EU’s antitrust regulators initially raised a number of concerns about the merger. In order to obtain the Commission’s approval and allay those fears, UPS and TNT attempted to sell off a number of their assets to French firm and fellow ‘integrator’ DPD. Additionally, UPS assented to DPD purchasing space on the UPS airline.

However the complex proposed asset sale did not do enough to placate the regulators, who refused to grant a deadline extension for finalising the agreement with DPD. Ultimately this decision caused UPS to withdraw from the TNT deal. The Commission felt that DPD did not have the proclivity or the capability to challenge UPS or competitor DHL in the future, thus rendering the asset sale meaningless.

The decision to reject the UPS/TNT merger is the latest strong showing by the Commission, coming less than 12 months after its decision to block the $9bn merger of Deutsche Börse and the New York Stock Exchange on similar grounds.

Joaquín Almunia, the EU competition commissioner, believed that the potential merger would bring about unfair competition and leave many European markets with only two or three ‘integrator’ alternatives, namely FedEx and DHL. Ultimately the Commission felt that this shortage of options would affect pricing policies and services available to customers. The Commission’s aggressive approach to mergers in recent times has drawn the ire of many – particularly American – dealmakers. Mr Almunia, however, has defended the Commission’s stance. Speaking in November he said “it is simply not true that the Commission is putting the brakes on the legitimate efforts of Europe’s firms to scale up. What we must avoid are attempts to shield Europe’s companies from competition, in particular during this harsh period for the economy. In this game, only a few of them will benefit, and the majority will lose.”

Although the supervisory body was not due to give its formal rejection of the merger until 5 February, UPS subsequently withdrew its interest in the proposed deal in mid January. “We are extremely disappointed with the European Commission’s position,” said UPS chief executive officer Scott Davis in a statement. “We proposed significant and tangible remedies designed to address the EC’s concerns with the transaction.”

UPS, having had its hopes of European expansion dashed, owes TNT a $267m break-fee as part of the terms of the original merger deal. It is likely that UPS will now look to expand organically through smaller, more piecemeal acquisitions, particularly in Asia.

The Commission’s decision to reject the merger came as something of a shock to the two companies. However, the markets have not viewed the deal’s collapse as entirely negative. Some analysts believe that while the Commission’s decision robbed UPS of the opportunity to increase its earning potential in the world’s second biggest delivery market, the rejection will not be completely detrimental to the firm. Ben Hartford, a senior research analyst with Robert W. Baird said that the prolonged merger “was becoming a distraction. It’s disappointing they didn’t get the deal done. It doesn’t change the fabric of the company.”

Immediately following the withdrawal, shares in TNT plummeted 41 percent and although the company is the fourth largest parcel group in the world, its strategy going forward is unclear. TNT Express was spun off from its parent company TNT in 2011 with a view to attracting a merger with either UPS or FedEx. However, now that the UPS deal has collapsed, a takeover proposal from FedEx seems unlikely for a number of reasons. Financially FedEx is not as strong as UPS. Furthermore, FedEx did not offer up a counterbid for TNT when the original merger was announced. FedEx also rejected the opportunity to acquire TNT’s assets during the proposed asset sale process. “FedEx has not expressed an interest,” said Bernard Bot, TNT Express’ acting chief executive. “We are focusing on executing our standalone strategy” he added.

Richard Summerfield