After Losing TNT, What UPS Needs Now

The surprising nix from EU regulators creates a hasty Plan B

   

“There is nothing so uncertain as a sure thing,” legendary NHL Coach Scotty Bowman once said . That’s just as true about international mega-mergers as it is about professional hockey. Package-delivery giant UPS (NYSE:UPS) might have everything on its side in its proposed $6.9 billion acquisition of TNT Express, but in the end Brown couldn’t beat the officials.

Last week, UPS ended its struggle to convince EU antitrust regulators that acquiring Europe’s second-largest shipping company wouldn’t hamper competition in that market. Instead of gaining a stronger competitive position against Deutsche Post’s DHL and U.S. rival FedEx (NYSE:FDX), Brown must pay TNT a $265.5 million breakup fee and rethink its strategy in the region.

Let’s be clear: The failed bid for TNT is no reason to flee UPS, which has solid fundamentals and is the package-delivery market’s 800-pound gorilla. But the unexpected turn of events is a game-changer, and Brown would be well served to pursue these three strategic priorities in 2013:

Find Another Route in Europe. UPS lost more than the breakup fee when it abandoned the TNT bid — it lost a big opportunity. Had the deal gone through, Brown would have had a 25% to 30% share of Europe’s fragmented small-package delivery market, which has continued to grow even while more countries are slipping into recession. More important, UPS would have scored huge wins in the Middle East and Asia, benefiting from TNT’s Hong Kong regional hub and extensive rail and road networks.

TNT, which has been hemorrhaging cash, still needs a truckload of bandages to stanch the bleeding. Absent other solutions, TNT likely will start examining asset sales — some of which FedEx could conceivably pick up at the right price. UPS must continue to seek out niche opportunities to enhance its position in Europe, proving that a few bumps and bruises won’t keep Brown on the sidelines in the world’s second-largest delivery market.

Get a Contract Done With the Teamsters. Its contracts with Teamsters union drivers are set to expire on July 31. The most recent negotiations with its Freight and Package Division drivers ended last Thursday and will resume Jan. 28. Although UPS has been proactive in trying to move the negotiations forward early, several potential sticking points could delay a deal.

Teamsters’ negotiators reportedly are balking at Brown’s plan to require higher healthcare contributions for active employees and retirees. Another sticking point likely will be UPS’ plan to integrate its trucking network to include drivers from its Package, Less-than-Truckload (LTL) Freight and Local Cartage operations. Doing so would deliver strong economies of scale, but some drivers fear it would boost subcontracting at the cost of union drivers. Look for this issue to heat up in the next couple of months.

Cash In on the U.S. E-Commerce Boom. With strong online retail growth and bullish holiday delivery volumes, it’s hard to believe that Brown faces challenges with its U.S. delivery fortunes. Although e-commerce has been the engine behind domestic shipping volume growth, the pressure is on UPS to keep rates low to satisfy heavy volume shippers like Amazon (NASDAQ:AMZN).

Brown has tried to do more with less by aggressively deploying technology to gain efficiency. But UPS must continue to rework its business model and revenue plans to keep margins healthy. Like FDX, UPS raised rates by an average of 5.9% for 2013 — but as freight auditing and consulting firm LJM points out, the highest rate hikes are reserved for the lightest-weight packages. It remains to be seen whether shippers will simply roll with the new pricing — or seek out creative alternatives.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned stocks.


Article printed from InvestorPlace Media, http://investorplace.com/2013/01/after-losing-tnt-what-ups-needs-now/.

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