TNT Express sale far from a done deal

In light of last week’s news that TNT NV, a provider of mail and courier services and the fourth largest global parcel operator, rejected an offer by UPS for TNT’s express business, reports are indicating that TNT is refocusing operations on its European-based business while it has seen significant financial losses.

Bloomberg reported that the 2011 operating loss at TNT Express was $139 million compared to earnings of about $238 million the previous year. And it added that TNT will seek cooperation agreements from airlines to carry goods outside Europe and partnerships to provide services in China and Brazil all while it remains “in discussions” with UPS.

“We recognize that more investment is required” in subsidiaries in Brazil and China to make them “high-standard operating companies, and we see some complementary competencies with potential partners,” Chief Executive Officer Marie- Christine Lombard said on a conference call with journalists, according to Bloomberg=. “It could be commercial agreements, could be joint ventures, it could go up to a sale. It’s too early to say.”

What’s more, the report said that TNT is planning to reduce costs by about $198 million by the end of 2013, with about one-third of the savings coming from reductions in TNT Express’s air-shipment capacity, as Lombard explained that ten-to-12 planes of its 50-aircfraft internal European fleet are to be phased out and intercontinental capacity cut in half. On top of this, Lombard said TNT plans to seek what it called preferred suppliers among airlines that can provide cargo capacity.

Meanwhile, my inbox got filled up yesterday and today with reports from Wall Street analysts regarding the UPS bid for TNT Express and what FedEx may—or may not—do in terms of getting into the game.

Here is some commentary from Jason Seidl from Dahlman Rose:
“The bid…has been discussed for more than a decade, but became more likely when TNT Express was spun off from PostNL (The Dutch Postal Company) in May of last year. Despite rejecting the offer, TNT management noted that it is still in talks with UPS. Rival global parcel provider FedEx Corporation has remained tight-lipped, but thus far appears to be sitting on the sidelines. We fully expect another bid for TNT to come this week.”

Seidl also broke down TNT’s customer share in respect to geography. It looks like this: 60 percent of TNT’s business comes from Europe; 25 percent from Asia-Pacific; and about 6 percent from the Americas. He noted that TNT has about a 10 percent market share in Europe, which is second to Deutsche Post at 18 percent, with UPS just under 8 percent, and FedEx at about 3 percent.

“With all the turmoil in the European economy, this may be the most opportune time to make a run at TNT,” wrote Seidl. “A deal would be much harder for FedEx to complete, as it does not have as strong a balance sheet as does its Atlanta-based rival. While some investors may be happy that FedEx has shown little interest, passing on TNT will essentially limit the Memphis carrier to a secondary role in the European express market for many years, as there are no other transactions of size.”

That last part is food for thought and potentially makes one wonder not if but when FedEx will get involved as an active bidder.

But that line of thinking could be premature, when looking at a research from David Ross at Stifel Nicolaus.

Ross wrote in a research note that FedEx has three options after learning of the UPS bid for TNT:
“1-Status quo - do nothing and continue to march its way toward its 10% operating margin goal in Express organically,
2-If it makes strategic and financial sense, make an offer to buy TNT, or
3-Start talking to Deutsche Post DHL about the potential of buying its package operation”

These possibilities all look viable on paper, but it is hard to say how it will play out.