FedEx and TNT Express: colouring

When purple and orange paint are mixed, the result is a unremarkable brown. FedEx, the US delivery company with a "purple promise" to customers, announced on Tuesday that it would like to blend with the "orange spirit" of Netherlands-based TNT Express. The new company would challenge US rival UPS, known for its brown vans and uniforms, for the number two position among European delivery companies. TNT Express shares jumped more than 30 per cent.

FedEx has bid €8 per share in cash for a company worth a tenth of its own $47bn market value. That works out to an enterprise value of more than nine times earnings before interest, tax, depreciation and amortisation. Though well above FedEx's six times multiple, it sits in line with the average valuation for European logistic companies, and about the same as that of UPS. Given cheap financing, the deal will probably add to earnings per share immediately, even without accounting for cost cuts.

FedEx has confidence that it can get the deal past European competition authorities; it has offered a €200m break-up fee to TNT. Why? It has promised it will sell off TNT Express's air cargo unit. FedEx already has plenty of capacity in air freight, while TNT Express has top share in European road haulage. UPS's attempt to buy TNT Express three years ago failed due to European regulators' fears that the combination would have emerged as the number one delivery company, well ahead of DHL. The FedEx-TNT Express combination would mean the three largest couriers would have roughly half the European market, with none having more than a fifth.

Given the euro's weakness against the dollar, FedEx has decided the timing is right. But really it has bet on a strong European economic recovery pushing TNT's ebitda back up towards its 2008 peak of €550m, about a third above this year's estimates. Without an economic rebound, this deal might turn a dreary colour indeed.

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