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Don’t fight the FedEx

7 April 2015 By Quentin Webb

FedEx is making a big opportunistic bet on Europe. The U.S. shipper has agreed to buy ailing Dutch rival TNT Express for 4.4 billion euros ($4.8 billion) in a friendly, all-cash deal. That seems a full price for a troubled target – but cost savings, cheap debt and a strong dollar could help deliver good returns.

The offer of 8 euros-a-share is a healthy 33 percent premium to TNT’s last close of 6 euros, and about 20 times the 40.2 cents of earnings per share analysts expect in 2016. That is far above FedEx’s median multiple of 15.3 times forward earnings over the last decade. The premium looks higher after considering TNT’s fading earnings power: EBITDA and EPS estimates for 2016 have fallen 22 percent and 27 percent in nine months, Datastream shows.

Step back, though, and the FedEx move looks more sensible. It can probably run the business better. Also, the price is considerably lower than United Parcel Service’s 9.50 euros-a-share offer, which Brussels killed in 2013. With its arch-rival offside, and no subsequent bidders, FedEx presumably did not feel obliged to pay a knockout price.

The dollar’s rally makes the deal even cheaper in FedEx’s home currency: 30 percent lower than the UPS bid, Berenberg analysts reckon. Any debt funding will be cheap too, since FedEx recently sold 50-year bonds with a 4.5 percent yield.

FedEx is paying nearly 1.1 billion euros more than TNT’s pre-deal market value. To make the deal stack up, it does not need to match the 400 to 550 million euros in annual synergies UPS targeted. With less overlap, it probably can’t cut costs as much. But 150 million euros of pre-tax benefits, roughly a third of the UPS goal, with a tax rate of 25 percent, would do the trick, even if the gains are valued at a modest multiple of 10 times.

Then consider the backdrop. Europe’s economy is perking up, which should in time benefit delivery firms. In turn the euro could recover too. If and when that day arrives, FedEx will have a stronger, leaner business worth considerably more in dollars. Talk about a special delivery.


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