DESPITE ITS POSITION as the No. 1 operator in the European express market and the world’s second-largest logistics provider, the recent boom in the logistics sector hasn’t shaken speculation that former Dutch mail monopoly TNT is a potential takeover target. It has achieved solid growth during the past four years, but still lacks the heft of industry giants such as FedEx Corp. or Deutsche Post AG and has been distracted by an investigation into tax liabilities.

As the world’s manufacturing base shifts east to China, India and other Asian economies, the companies that bring the goods to the West — freight handlers like TNT, logistic companies like Deutsche Post and Deutsche Bahn AG and port operators like Dubai’s DP World and Singapore’s PSA Corporation Ltd. — have experienced a boom. TNT Chairman and Chief Executive Peter Bakker has seen the company’s revenue increase by around 13% since he took over from Ad Scheepbouwer in 2001. The boom times mean the market leaders are on the lookout for suitable targets to fit their expansion plans.

To avoid TNT being such a company, Mr. Bakker wants to diversify TNT’s revenue streams into different sectors and different regions, either by strengthening existing operations or by adding to them with acquisitions.

“We know our business well. The more volume you have, the lower are the costs. We see growth opportunities in Europe, Eastern Europe, Turkey and Asia, including China,” Mr. Bakker said in an interview.

During the past year, TNT has started an ambitious restructuring program to streamline its operations to concentrate on TNT Mail, the company’s postal unit, and TNT Express, its business-to-business freight-and-parcel delivery service, while selling off its contract-delivery unit, TNT Logistics, which has suffered as competition eroded its margins and led to losses in Europe.

At the same time, Mr. Bakker plans to deter potential suitors by using some of the proceeds from the sale of its logistics unit, valued at 1.3 billion euros ($1.6 billion), for a share buyback. Mr. Bakker expects the sale to be completed in the second half.

“I think it is fair to say that a big chunk of the proceeds will be used to buy back more shares,” said Mr. Bakker. He would consider small acquisitions to bolster the company’s presence in Asia and Europe, which would fit into his long-term strategy for the company, dubbed Focus on Networks. TNT has links to operators in major markets such as Japan, Korea and China. It has also said it plans to invest 100 million euros in Indian operations during the next five years.

“We have no plans to make big acquisitions. But, for example, the acquisition of a freight-management company in China is an interesting option,” Mr. Bakker said.

He wants TNT to become the market leader of the pan-European postal market as it deregulates. However, the company’s mail unit, TNT Mail, which accounted for around 38% of group revenue in 2005, has to deal with electronic mail and increased competition. That partially explains why TNT’s margins fell to 19.5% last year and are expected to decline further to 18% this year.

By using its complementary mail and express networks and simplifying its organizational structure, TNT can further reduce costs, Mr. Bakker said. “We can benefit from synergies between mail and express by using the hubs and our road network. Also, management can be used for both businesses as the economy of the delivery business is more or less the same. For example, linking the road network we have in Southeast Asia with our China operations should make us a leader in the express business in China within five years,” Mr. Bakker said.

Despite his enthusiasm for the strategy, TNT can’t shake speculation that it is a ripe takeover target.
“I expect a takeover bid for TNT to happen rather sooner than later,” said Danny van Doesburg, an analyst at Amsterdam brokerage firm SNS Securities. Relatively free of debt with high growth margins and strong cash flow in the mail-and-express business, the company would make an attractive buy for a large strategic player, he said. He reckons 15 billion euros would be a good price for the company, implying a premium of more than 30% for shareholders.

However, a takeover might not be straightforward. The Dutch government holds a 10% stake in TNT as well as a so-called golden share which it could use to block mergers and takeovers. Mr. Bakker expects some movement on that issue this year, saying he expects the government to eventually give up the 10% stake and the golden share. That would clear the way for industry buyers such as U.S. competitors FedEx and United Parcel Service Inc., which would be able to realize synergies with TNT’s Express operations.

In size, TNT is dwarfed by UPS’s more than 40 billion euros in annual revenue. FedEx has around 30 billion euros, compared with TNT’s 13 billion euros, including the Logistics unit. TNT has 160,000 employees compared with 407,000 for UPS. FedEx employs around 250,000 people. A takeover by either U.S. company would significantly increase its foothold in Europe and Asia and would follow German rival Deutsche Post’s GBP 3.8 billion ($6.7 billion) purchase of Exel PLC of the U.K. last year.
Meanwhile, TNT last week said it had concluded an independent inquiry into possible tax irregularities which had uncovered “illegal actions” at some of its subsidiaries, relating to the backdating of documents. Employees involved in the matter no longer work for the company, Mr. Bakker said, declining to elaborate.

Separately, the company estimated its total liability at between 150 million euros to 550 million euros for possible claims relating to its global-tax situation. A final tax settlement could take years but talks with tax authorities to determine a possible outcome have begun, Mr. Bakker said. He declined to say which countries are involved.

With TNT’s sale of the Logistics unit and the planned share-buyback program, the company is likely to become less attractive to private-equity buyers, but could be an attractive asset for rivals looking for synergies. Mr. Bakker remains relatively upbeat. “Ever since I joined the board in 1998, there has been speculation about TNT being taken over. We’re smaller, but from a business point of view there’s no reason for us to seek an alliance or to be taken over,” he said.

Source: The Wall Street Journal Europe

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