TNT express to refocus on Europe operations as losses mount

TNT Express NV, the Dutch express- delivery service in takeover talks with United Parcel Service Inc., said it will refocus operations on Europe as financial losses mounted.

The 2011 operating loss at Europe's second-largest express- delivery service was 105 million euros ($139m) compared with earnings before interest and taxes of 180 million euros a year earlier, the Hoofddorp, Netherlands-based company said today. Sales climbed 2.7% to 7.25 billion euros.

TNT Express, which was spun off from the former Dutch national postal operator in May, will seek cooperation agreements with airlines to carry goods outside Europe and partnerships to provide services in China and Brazil. TNT Express is in talks with UPS after rejecting a 4.89 billion-euro offer on Feb. 11 from the Atlanta-based company.

"We recognize that more investment is required" in subsidiaries in Brazil and China to make them "high-standard operating companies, and we see some complementary competencies with potential partners," CEO Marie- Christine Lombard said on a conference call with journalists. "It could be commercial agreements, could be joint ventures, it could go up to a sale. It's too early to say."

Shares decline

TNT Express dropped 29 cents, or 2.9%, to 9.87 euros in Amsterdam today. Following UPS's offer of 9 euros a share, TNT Express's stock is trading up 71% this year, valuing the company at 5.37 billion euros.

The Dutch company plans to reduce fixed costs by 150 million euros by the end of 2013, TNT Express said today. The program will include reorganization costs and write-offs of 150 million euros.

Operating losses last year amounted to 360 million euros in the Americas and 76 million euros in the Asia-Pacific region. Operating profit in Europe totaled 356 million euros.

"They're throwing in the towel a bit too early in Asia- Pacific and Brazil especially," Andre Mulder, an Amsterdam- based Kepler Capital Markets analyst who recommends buying the shares, said by phone. "They have 20% market share in Brazil, so they should be able to make a good margin there. If they can't do it with that market share, who else can?"

Air capacity

One-third of the cost savings will stem from reductions in TNT Express's own air-shipment capacity, with 10 to 12 planes of its 50-aircraft internal European fleet being phased out and intercontinental capacity being reduced by half, Lombard said. TNT Express will seek "preferred suppliers" among airlines that can provide cargo capacity, she said.

The remaining two-thirds of the savings program will focus on reorganizing back-room operations, with administration and information technology among activities that will be contracted out, according to Lombard.

An acquisition of TNT Express by UPS, the world's largest package-delivery company, or its main competitor, Memphis, Tennessee-based FedEx Corp., has been speculated about for years as the U.S. companies study European expansion. The talk gained momentum after TNT Express's spinoff from the Dutch mail service, now called PostNL NV.

Market share

Underlying operating profit, which excludes one-time effects and currency shifts, fell to 228 million euros in 2011 from 323 million euros a year earlier and amounted to 3.1% of sales, missing TNT Express's target range of 8% to 9%. The company reduced the target in October from a plan for the margin to exceed 9%.

Deutsche Post AG's DHL unit is the biggest express delivery service in Europe, with a 17.6% share of the market in 2010, according to figures from Transport Intelligence. UPS had a 7.7% share of the region's express and parcels service market that year, compared with FedEx's 3.3% and TNT Express's 9.6%.

"We have a great presence in European countries, so I would say there is no reason why that can't grow independently," TNT Express Chief Financial Officer Bernard Bot said on a telephone conference today with journalists, declining to comment further on the UPS offer.

(Published by Bloomberg - February 21, 2012)