TNT under pressure to sell express unit

Dutch logistics company TNT NV is preparing to separate its mail and express operations, but pressure on management at the express business is mounting as doubts grow over its ability to deliver a turnaround and some shareholders argue the company should explore a sale, reported Dow Jones Newswires.


If shareholders on May 25 approve the company's demerger proposal, chief executive Peter Bakker will depart, leaving behind some unhappy investors who likely will heap more pressure on management to create value.


After TNT last year announced its decision to split the company, it ran into trouble merging its operations in Brazil and failed to fulfill promises to improve profitability despite rigorous cost cuts during the economic downturn.


Ahead of next week's annual general meeting, institutional shareholder adviser ISS Proxy Advisory Services said the proposed governance of the newly created express entity includes measures conflicting with interests of shareholders and recommended they vote against discharging the supervisory board as a way to show their disdain.


In a letter to shareholders, Bakker only partly countered criticism and didn't respond to comments made about the protectionist measures. He concluded that it would be inappropriate to vote against discharging the supervisory board.
TNT declined further comment.


"Shareholders are trying to increase pressure to enable a takeover of TNT Express," said Petercam analyst Thijs Berkelder, referring to ISS' advice.


Several shareholders over the years have asked the company to consider its strategic options and to be open to interest from potential buyers. They are convinced TNT has been approached in the past, although that hasn't been confirmed by TNT.


To increase the chance of a deal, shareholders put pressure on management to split the company. Bakker said a split wouldn't make sense, but early last year announced the mail business would be prepared for a partnership or initial public offering.


Shareholders continued to press for a breakup and eventually the supervisory board stepped in. It hired Credit Suisse as financial adviser and in August announced its intention to separate the mail and express businesses.


Rumours of TNT receiving approaches from its biggest rivals, Fedex Corp and United Parcel Service Inc. (UPS), have surfaced regularly. Several people familiar with the matter have said TNT has been in talks about a sale of the express business in the past. Analysts have said an acquisition of TNT would make sense for Fedex or UPS as it would provide scale in Europe's express market and bring significant cost savings.


UPS declined to comment while Fedex wouldn't comment immediately.
"TNT Express has always been attractive for predominantly UPS, as UPS can create the most synergies," Berkelder said.


On a standalone basis, analysts value the express business at US$5 billion to $7 billion.


TNT's express strategy was focussed on the European express market and expansion in emerging markets, mainly China, India and Brazil. In 2010, Asia and Latin America contributed about 30 percent to sales, but remain loss making. It recently promised these businesses would grow by double-digit margins in the medium term and make a solid contribution to earnings.


However, integration issues at its Brazilian operations resulted in millions in claims and provisions, a $168 million impairment charge and its biggest Brazilian client decided to stop doing business with TNT.


On top of that, the express unit's recovery didn't pan out as planned despite rigorous cost cutting during the financial crisis. Its operating margins showed no improvement when sales picked up during the recovery. TNT lowered and later abandoned its 2015 targets. Its Chinese road-based network isn't expected to yield results soon, and the company struggles to compete with its larger rivals in the higher-margin air express cargo market.
Analysts doubt if management will be able to swiftly turn things around.


"TNT can realise a break-even result in China in two or three years, but it will then still take a while before it can make profit. It took UPS 20 years to become profitable in Europe," said Menno Sanderse, analyst at Morgan Stanley.


TNT is market leader in the intra-European express market, where it faces margin pressure, because of its client and product mix. It aims to get margins up to 10 to 11 percent in 2015, from nine percent currently. However, TNT's clients are predominantly active in the automotive and industrial markets and increasingly opt for slower, but lower-cost road transportation services.


"A margin of 11 or 12 percent might be possible in an extremely favourable environment, but for a while 10 percent will be hard enough to realise," Sanderse said.


Some investors have more confidence in the strategic value the company would offer for its rivals, especially as the company's share price has dropped as a result of the operational issues.
Due to disappointments over the years, investors increasingly have lost faith in the company's ability to create value on its own and think actively pursuing a sale of the business would provide an alternative that has lower execution risks for shareholders.


As rumours about TNT receiving takeover approaches from its biggest rivals failed to lead to a deal, shareholders got worried that TNT's value would diminish, and with it the likelihood of a deal for its express business. Because UPS and Fedex have such dominant positions in the US market, they are able to generate vast amounts of cash to invest in strengthening their networks in Europe.


Apart from UPS and Fedex, there are no other obvious candidates to buy TNT Express, although some experts think a Chinese investor could be interested for strategic reasons. Germany's Deutsche Post DHL isn't considered a likely suitor because analysts think a combination would encounter serious anti-trust issues. DHL declined to comment.


As many had expected a takeover of express to materialise ahead of the split, skepticism about a deal is growing. "The legal separation of mail and express was concluded on January 1 and, since, no party has emerged to buy the express business. Why would that happen now?" asked Berkelder.
(Source:http://www.cargonewsasia.com)