There's "Definitely Life after UPS for TNT" - Barrons.com
Although an offer from FedEx is unlikely, some analysts see Dutch parcel-delivery outfit TNT eventually doing well on its own.
Investors in Dutch parcel-delivery company TNT Express had a tough start to the week when United Parcel Service pulled its 5.2 billion euro ($7 billion) yearlong bid for the company, causing TNT shares to plunge 41% by Monday's market close.
The good news is that it could now be an opportune time to buy TNT stock (ticker: TNTE.Netherlands). With the UPS (UPS) takeover premium gone, investors are left wondering what TNT will do next. Some fund managers and analysts say the company could do quite a lot.
Says Daniel Pasini, a portfolio manager with London-based ACPI Investment Managers: "The market in Europe will continue to be challenging, but given [TNT's] exposure to Asia Pacific and Brazil, the overall market situation, long term, is not too bad."
He views TNT stock as undervalued and expects it to trade near its pre-UPS-bid level for now. "Once operations in emerging markets start to turn around, upside should be more meaningful." he adds.
Several other analysts share Pasini's view. Some were penning upgrades even before the dust settled on UPS's surprise withdrawal, born of delays due to European regulators' antitrust concerns.
TNT CAN NOW IMPLEMENT a strategic plan it put on hold nearly a year ago when UPS made its approach. To show it can survive independently, TNT promises to refocus on its core European business. It also plans to review its operations in emerging markets, such as China and Brazil, part of an expansion plan that had upset some shareholders.
Third-quarter operating income rose in TNT's Asia-Pacific region, despite faltering demand in some countries there. Its Brazilian business remains in the red, but isn't an obvious disposal candidate. Analysts say TNT's leading 20% market share in Brazil means that earnings eventually could be strong there.
The Dutch company sold its Indian business a couple of months before UPS made its bid. But shareholders had wanted more. They had been putting TNT under pressure to make strategic changes or consider being sold months before the UPS bid.
The resumed strategy includes €150 million in cost cuts by 2013. This has led Rabobank analyst Philip Scholte to raise his rating on the stock to Buy from Hold, even though he cut his price target, from €9.50 to €6.00. The stock has been trading below €6. His rationale: "We believe this huge savings target can provide ample compensation for a weak European economy."
TNT was spun off from Dutch mail company PostNL (PNLYY) in 2011, but it suffered a series of profit warnings as loss-making emerging-markets businesses dented its European earnings.
Kepler Capital Markets analyst Andre Mulder cut his TNT price target to €6.50 from €7 following the UPS withdrawal, but he sees upside potential of 30%. He argues that there is "definitely life after UPS for TNT."
TNT's big strength is in Europe, where its operations account for around 60% of its overall sales. Despite its current troubles, the European market is growing by up to 5% a year, Mulder says. That compares with a mature U.S. market, which is static at best and could even be shrinking. He reckons that the Dutch delivery company's profit margin in Europe, before interest and taxes, could rise over time to 10% from around 6%-7% now.
The European market's allure has prompted speculation that FedEx (FDX) could step in to buy TNT, particularly as the collapsed deal means that TNT remains the smallest of the world's main express-delivery companies. However, ACPI's Pasini says FedEx is unlikely to make a bid, as it could suffer the same antitrust concerns that finished off the UPS offer. And FedEx has been growing satisfactorily in Europe without acquisitions.
PERHAPS HARDEST HIT by the failed UPS bid is PostNL, which still owns a hefty 30% of TNT. Its stock slid almost 36% on the day the UPS pullout was announced. Pasini warns that PostNL doesn't have enough cash flow from operations to cover debt coming due in 2015. "The underlying business is not attractive, as mail volumes continue to have negative growth," the analyst adds. "Over all, this stock will behave like TNT. If TNT goes up, Post should move higher with a higher beta."
On the downside, the stock overhang from the PostNL stake, which it said it now plans to "monetize"—meaning sell—over the medium term, could take some of the shine off TNT stock for now.
TNT closed at €5.46 Friday, down almost 34% on the week, while PostNL fell just over 37% in the same period to end at €1.78.