The €5.2 billion takeover of TNT Express by UPS – essentially a merger of two of ‘the big four’ in the courier, express and parcels (CEP) sector – could have wide-ranging consequences. That is, if it goes ahead. In July, the European Commission (EC) opened an investigation into the proposed acquisition of the Dutch company by its US competitor, citing concerns that the deal could “significantly impede effective competition”.
The EC said its preliminary investigation indicated “potential competition concerns” in the markets for small parcel delivery services, in particular, international express services, in numerous member states, where the two parties would have a very highly combined market share. The EC plans to decide by the end of the year if the merger should go through. But assuming it does, what will the effect on the global CEP industry be?
“From the EC competition perspective, it’s a reduction in competition moving from four major players down to three,” explained Stephen Baggett, OAG Cargo’s director of sales for the Americas. “However, on the positive side, what that gives TNT’s customers is it gives them a better global coverage.
“From the UPS customer perspective, similarly, it gives them a better service, network coverage in Europe and Asia. I think there’s more positives out of this than negatives. Any acquisition has to be ratified by the merger commissions in North America and Europe, and this has such a big impact on the European business-to-business consumer, because of the reduction in service providers,” he added.
TNT Express reported improved second quarter earnings, thanks largely to a significant reduction in losses at its Brazilian operations. Net profit was €40 million, from just €4 million in the same period a year ago, sales grew 1.7% to €1.83 billion, with volumes up in Europe. However, TNT’s European profits fell due to business customers opting for cheaper options.
“The EC has expressed its concern and rightly so. The point they’re making is that the offer for customers will go down from four to three. It is difficult to predict what will happen. FedEx is pretty weak in the market, so customers will essentially only have a choice between two companies. It will definitely lead to a weakened market in Europe,” said Philipp Anhalt, manager, mergers and acquisitions at ITA Consulting. “This has such a big impact on the European business-to-business consumer, because of the reduction in service providers. But when you have FedEx and DHL still competing, then you have sufficient competition to make sure you are still getting the best prices required,” highlighted Baggett.
“UPS will be saying we’re now offering TNT customers a much bigger selection on choice, and it is the same for UPS customers, they are getting a wider selection too. Absolutely, there will still be competition, because when you are competing at that level, one of the measures of success is market share, which can either be bought, with lower prices, or won, on the level of service you offer. If anything, it will make competition greater. UPS, by this acquisition, will be competing on a global basis,” he added.
UPS and TNT say the merger will “create a service leader in the logistics industry and an enhanced, integrated global network”. The complementary strengths of both organisations, they say, will create a “customer-focused global platform” that will be a leader in transportation technology and customer service.
UPS believes the combined network will improve the flow of trade, making its customers more competitive in the US, Europe, Asia and Latin America. Although the majority of UPS’s business is in the US, with close to 400,000 employees, the merger would more than double their international staff, from 74,300 to around 150,000. Aircraft would increase from 223 to 270, while profits would also increase. Last year, UPS’s revenues were €40 billion while TNT posted a relatively modest €7.25 billion.
UPS’s business is split roughly three quarters in the US and a quarter internationally. TNT, is split 63% Europe, the Middle East and Asia, 24% Asia-Pacific, 7% Americas and 6% other networks. In terms of bases, UPS has seven in the US: Cologne/Bonn (CGN) in Europe; Shanghai, Shenzhen and Hong Kong, in Asia; and Hamilton, Ontario, in Canada.
In a joint statement, they said: “UPS and TNT Express welcome the opportunity to further engage with the commission’s competition services and remain convinced the merger will benefit customers and other stakeholders and look forward to successful completion of the regulatory process.”
A UPS spokesperson said: “The combination will increase the percentage of revenue derived from non-US operations at UPS from 26% to 36%.” He added that there would be a four-year integration process once the deal was approved. “There are many parts of TNT’s business that are attractive to UPS. TNT is operating a ground freight network in Europe, something that UPS does not do currently. They also have more extensive operations in Australia, Brazil and several other countries than we do today.”
DHL, meanwhile, seem to have no issues with the deal. A spokesman said: “We are comfortable, and quietly confident about the deal. It allows us to focus on our customers while they are focused on integrating.”
This is a view echoed by Anhalt: “In my view, DHL can live with the situation. They will be better placed with one less competitor. For the moment, they will feel confident to see TNT and UPS struggle with the integration process and they will be able to steal customers away. I wouldn’t be surprised if that process is already in the making.”
The deal has not created many waves in North America. The perceived view there is that the move is primarily aimed at UPS gaining a stronger footing in Europe and Asia. In Europe, TNT Express has a hub in Liége, while UPS’s base is at Cologne/Bonn. Is either under threat?
“From what I have been reading, the whole basis of UPS’s acquisition move is that it gives them a bigger and better foothold in Europe and Asia,” said Baggett. He added that with TNT’s road operations also hubbed at Liége, Cologne/Bonn was more likely at risk.
“I read that UPS pledged to keep running the Liége hub and to keep as many jobs as possible, but that could change pretty quickly,” said Anhalt. “I don’t know if the Cologne hub is large enough [on its own], but they could look to consolidate in Cologne, Liége or some other place.”
Cologne/Bonn executives declined to comment on specifics of the merger, but pointed to UPS’s $200 million investment in the hub last year. Walter Römer, head of corporate communications, said: “Cologne/Bonn is one of the biggest express-cargo-airports in Europe and the third to Frankfurt and Leipzig in the German air cargo sector, with UPS as the biggest customer. In September 2011, UPS announced a significant expansion of its European air hub in Cologne/Bonn. The $200 million investment will utilise the latest UPS technology to improve efficiency and support continued European growth.”
UPS Europe president, Jim Barbe, said: “The Cologne hub has served us well for 25 years. It continues to be exactly where we need it in order to best serve our customers on the important trading lanes within Europe, and beyond to the Americas and Asia.”
Interestingly, TNT is more talkative on its Liége hub, which comprises TNT Airways and TNT’s ‘Euro Hub’. EU regulations require that, in order to obtain and retain an operating license, an EU air carrier must be majority owned and effectively controlled by EU nationals.
Cyrille Gibot, TNT Express senior press officer, said UPS recognised it cannot have majority ownership or effective control of TNT Airways. “UPS and TNT are therefore working towards a legal solution to ensure continuation of TNT Airways’ existing operations upon completion of the merger. It is too early to answer questions about TNT’s Euro Hub. Like all other parts of TNT Express, the air operations will be part of the integration plan, which will be developed during the integration phase, after completion of the intended merger,” he said.
“UPS has said it recognises the significant value of TNT Express’ operations, assets and people in Liége and will seek to continue the future utilisation of these operations, assets and people within the combined group,” he added.
So maybe there is a future for both Cologne/Bonn and Liége, but it is Asia, where the TNT deal will really come into play, explained Baggett. “In Asia, UPS are not one of the key players, it is FedEx and TNT,” he said. “This deal will help them most probably leapfrog FedEx to become one of the largest service providers of this type. TNT has a new hub in Hong Kong and one in Singapore, so this will improve UPS’s network in South East Asia, giving them air and road capacity. Similarly, in China, TNT has a huge road distribution service there. I think it is 500 Chinese cities served by TNT. That really does help UPS get into the domestic Chinese market.” So, while Europe may be the sticking point in this deal, it is not necessarily UPS’s main focus.
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