UPS acts with such precision that it famously minimizes the number of left turns drivers take and is installing keyless start and entry in 64,000 vehicles to save roughly three seconds per stop.
The Sandy Springs logistics company can tell when a truck is idling. It knows where every package in its system is at a given moment.
So the stumbling blocks UPS has faced in its largest-ever acquisition — the $6.77 billion purchase of Netherlands-based TNT Express — have been something of a surprise.
“It’s obviously not going as expected,” said Kevin Sterling, senior vice president for BB&T Capital Markets. “It’s more difficult than it should be.”
Peggy Gardner, a UPS spokeswoman, said she wouldn’t characterize the delays as surprising. But the company’s time frame for completing the acquisition has so far shifted twice.
The original offer period was to end Aug. 31, but that date was extended to Nov. 9 because UPS was not going to receive clearance from the European Commission in time. UPS already has asked for another extension, Gardner said.
Over the summer, the European Commission elected to delve deeper into the deal’s impact on package-delivery competition in Europe. On Oct. 19 UPS received a statement of objections from the commission, a confidential document that addresses the potential competitive effects of the merger on the continent’s express small package market.
UPS is widely expected to make concessions to the commission in response to its concerns. They could range from a commitment to keep TNT jobs for a period of time to the sale of some elements of the combined company.
The extended review has pushed back UPS’ deadline to close the acquisition, first announced in March. It initially was expected to close by the third quarter of this year. The deadline later was moved to year’s end, but the expected completion date now is not until 2013.
“It’s a complex transaction,” UPS Chairman and CEO Scott Davis said in a Tuesday call with investors. “We’ve got a ways to go.”
The company expects to take several weeks to evaluate the statement of objections, Davis said. UPS Chief Financial Officer Kurt Kuehn said he feels “pretty confident” the company will clear the regulatory hurdles.
But Kuehn, too, said the depth of the inquiry was more than UPS had anticipated.
“We expected initially to clear in phase one,” he said. “They decided they needed further review.”
Still, Gardner said, the company knew it was not uncommon for deals of this size to undergo further scrutiny, even if UPS executives had hoped theirs would be approved more quickly.
Both Kuehn and Davis said they remained committed to completing the deal, though Davis said there was “a lot of work to do.” UPS is on the hook for about $259.5 million if it is unable to receive regulatory approval, or if the merger does not go through for other reasons.
The odds that the deal will go through as planned are no better than 60-40, Sterling said.
“The European Commission is playing hardball,” he said. “They’re making UPS bend over backwards.”
The commission has a track record of scrutinizing deals that would alter the competitive landscape. This time, its concern is that UPS would have the ability to dictate what business it wants to accept and what it doesn’t, said Mark Schoeman, CEO of the Colography Group, an Atlanta transportation research firm. That would have negative implications for European customers. UPS maintains that customers would not be hurt by the purchase.
When the commission began considering the deal, analysts said, it probably focused on competition among the big players — DHL and FedEx, in addition to UPS and TNT. But UPS likely considered the thousands of smaller courier services and other package-delivery players as its competition, too.
UPS declined to discuss the commission’s concerns, but Doug Caldwell, AFMS Global Logistics Management Group’s Europe vice president, said he thought they would be “very significant.” While he still expects the deal to be completed as planned, Caldwell said he thinks politics are playing a large role in the investigation.
“At every step of the process, it’s been more difficult than UPS first thought,” Caldwell said.
Although the TNT deal is by far the largest UPS has ever made — its next-largest was the $1.3 billion purchase of Overnite Transportation in 2005 — Sterling said the nature of the purchase makes it more difficult. There are more than two dozen countries involved in approving the deal, and each is looking out for the interests of its own citizens.
“The ball’s not in their court,” he said. “It’s very rare.”
Even if the deal fails, analysts said, the effect on UPS will be minimal. Schoeman said it would slow the company’s ability to expand as quickly as planned but would not harm anything it is doing in Europe. The effect would be a kink, he said, but not devastating.
Still, Schoeman said UPS’ stance on the acquisition has been “somewhat presumptuous,” and the company should have seen signs it might face challenges.
“I think UPS thought it would go through effortlessly,” he said. “I don’t think they thought it would get to this point.”
The company is likely running the numbers, Schoeman said, to see what concessions are worth making and at what point it should instead reconsider the purchase. It’s a position UPS doesn’t find itself in very often.
“Typically, when they go after something, they don’t have a lot of stumbling blocks,” he said.
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