AMSTERDAM UPS (UPS.N) is dropping its $7-billion (£4.4 billion) bid for Dutch delivery firm TNT Express TNTE.AS after European anti-trust regulators said they would veto it, leaving TNT's future in doubt and almost halving the value of its shares.
Shares in U.S.-based United Parcel Service Inc gained 1.2 percent on Monday after the world leader in the sector said in a statement that European Union officials told it the EU executive Commission would veto the deal. An EU source confirmed that and said the decision could be made public as early as next week.
UPS wanted to buy the smaller firm for its European network and assets in fast-growing Asia and Latin America. But while the collapse of the 5.2-billion euro takeover means a rethink at UPS, the impact is far greater on TNT, which is now struggling in a weak European market and lacks a strategy for developing on its own after nearly a year of negotiations on the merger.
Investors wiped nearly 2 billion euros off its value as the share price dived 42 percent to 4.750 euros.
The two companies offered to sell some operations to ease concerns about competition in Europe, where rivals FedEx (FDX.N) and DHL had lobbied the Commission to block the deal, a banking source said. But UPS and TNT failed to find buyers and planned asset sales were not enough to satisfy EU officials.
Shares in U.S.-based FedEx were slightly firmer, up 0.3 percent, while those in DHL's German parent Deutsche Post (DPWGn.DE) were down by a similar margin. A senior official at the latter told Reuters that Deutsche Post had no interest in buying TNT nor any other express delivery business.
Since DHL would probably also face high anti-trust hurdles in a bid for TNT, FedEx may be a suitor, analysts said - though a lack of rival bidders means it is unlikely to be in a rush.
Philip Scholte, an analyst at Rabobank, said the deal's failure was a setback for UPS, which will pay TNT a termination fee of 200 million euros: "This is going to make it hard for UPS to increase its position in Europe on its own," Scholte said.
TNT faces an uncertain future. It has had to cut capacity in Europe in response to falling demand, was hit by restructuring problems in Brazil and is considered a minor player in China. Its chief executive quit soon after UPS made its offer in March.
TNT had been partially split from Dutch postal operator PostNL (PTNL.AS) in May 2011 in an attempt to profit from express operations as traditional mail business declines. But its weak performance quickly prompted activist shareholders to push for a management shake-up or an outright sale.
"Now TNT will have to continue alone," said Scholte at Rabobank. "TNT's management will have to roll up their sleeves, come up with a plan and get down to work."
TNT, which reports annual results on February 18, said it would update investors on its strategy in due course. Shares in PostNL, its biggest shareholder, plunged by over a third.
A new merger proposal for TNT seems unlikely, at least in the short term. Its closest European rival, DHL, is bigger in Europe and would be unlikely to get EU competition approval.
"FedEx is the only other option," said analyst Maarten Bakker at ABN Amro. "And they are not going to be in any hurry because there is simply no rival bid."
Any bid from an existing operator will face questions from an EU Commission concerned about prices being pushed up and wary of mergers that shrink any market to three players from four - as would have happened had UPS faced only FedEx and DHL.
Competition commissioner Joaquin Almunia said last week that UPS would need to create an equivalent rival to TNT before he would approve the deal. In the end, the U.S. firm seemed not to have done enough to help France's DPD expand its challenge.
UPS had offered to sell warehouses and customer bases in 15 countries, mainly in eastern Europe, and discussed divesting other assets, including some to FedEx, according to media reports. But FedEx and DPD did not take up offers of assets.
"FedEx's heavy lobbying against the deal didn't help either, and more generally the lack of bidders was a problem," said a source familiar with the deal. "FedEx didn't offer to buy any of the assets on the block. La Poste-DPD were very close to buying the international express unit but it didn't happen in the end."
UPS chairman and chief executive Scott Davis voiced his disappointment in a statement: "We proposed significant and tangible remedies designed to address the EC's concerns with the transaction," he said.
"The combined company would have been transformative for the logistics industry, bringing meaningful benefits to consumers and customers around the world, while supporting growth in Europe in particular."
The European Commission, however, was left unimpressed.
In other anti-trust rulings recently, Almunia vetoed a $7.4-billion financial exchange merger between NYSE Euronext and Deutsche Boerse in February, saying the deal would have given the new company a lock on European futures trading.
And this month Hutchison Whampoa 0013.HK only overcame his concerns that its purchase of Orange Austria would reduce competition in the Austrian telecoms market by agreeing to help other companies break into the market.
Universal Music Group staved off an EU veto on its $1.9-billion plan to buy EMI's recorded music unit in September only after promising to sell some of the British firm's most valuable labels, to get its market share below 40 percent. ($1 = 0.7493 euros)
(Additional reporting by Foo Yun Chee in Brussels and Sophie Sassard in London; Editing by Peter Graff and Alastair Macdonald)