Following the European Commission's decision not to issue any major objections to FedEx's €4.4 billion takeover of rival TNT, the sale of the group's airline unit, TNT Airways and obtaining the approval of national jurisdictions are now the main hurdles in sealing the deal.
At TNT's Q3 results conference call earlier today. the Dutch group's CFO, Maarten de Vries, described the Commission's decision as "a significant but not final step in the acquisition process."
"We continue to work with FedEx and competition authorities around the world to obtain all required clearances. We are firmly on track and are very much looking forward to closing the transaction in the first half of 2016," de Vries said.
Out of 19 regulatory bodies, five had cleared the deal – Russia, Japan, Ukraine, New Zealand and Taiwan. de Vries revealed in answer to a question from CEP Research.
"The most important jurisdictions where we are now in process are Brazil and China and we are working very closely with the competition authorities in these countries We are pretty confident we will close the deal in the first half of 2016."
He declined to disclose how many shares have been sold so far relating to the FedEx offer but did remark that the deadline (for the offer), which is set to expire on 30 October, is likely to be extended by between two and 10 weeks.
Commenting on the sale of TNT Airways, de Vries said: "It is an important step because as a US company, FedEx cannot own an airline in Europe."
The challenge was to complete the task "while ensuring continuity in our service provisioning in Europe."
Asked by CEP Research how much progress had been made on the sale and whether any bids had been received for the airline unit, de Vries replied:
"We don't comment on progress but obviously we will make sure that at closing we are in compliance over the sale of TNT Airways."
While all the attention appeared to be on the approval of FedEx's proposed takeover, TNT was "completely focused" on implementing its Outlook strategy "and we are making a lot of progress in this and basically investing in the business," de Vries underlined.
"The Outlook strategy is one of the core elements for which basically FedEx is acquiring TNT. So we keep focusing on implementing it and focusing on our customers."
As for TNT's third quarter results, it reported revenues of €1,674 million, up 2.3% year-on-year, and a negative operating income of €27 million, compared with a negative operating income of €51 million for the third quarter of 2014.
Currency comparable revenue growth was 1.8%. Underlying revenue growth, excluding currency effects and the negative impact of lower fuel surcharges, was 3.6%, reflecting higher revenues from SMEs, particularly in the International Europe segment.
The economic volatility in Australia, China and Brazil weighed on TNT’s revenues and overall performance in these parts of the world. Operating income includes net one-off charges of €40 million, including restructuring charges of €23 million.
TNT’s adjusted operating income was €13 million in the third quarter, compared with €46 million for the same period of last year.
Operating result was affected by pricing pressures, Outlook-related transition and project costs (€8 million), and costs to enhance service capabilities. TNT experienced lower margins in France in particular. Capital expenditures increased to €62 million (or 3.7% of revenues) in the third quarter of 2015 from €41 million (2.5% of revenues) in the same period of 2014.
During the quarter, TNT successfully opened three new automated sorting facilities in Madrid, Swindon and Eindhoven, while upgrading existing ones as part of its Perfect Depot project. The net cash position of €223 million at quarter-end (2Q15: €261 million) reflects the investments made as part of the Outlook strategy.
"Revenue growth from SMEs continued in the third quarter. Service performance and customer satisfaction further improved. Our investments in IT and productivity are on track," commented TNT's CEO Tex Gunning.
"As said, time is needed for these profound transformations to influence the bottom line. 2015 is a transition year for TNT. We expect to see year-on-year margin improvements from 2016 onwards."
International Europe segment
International Europe’s revenues were €693 million, up 4.4% from last year’s third quarter.
Currency comparable revenue growth was also 4.4%. Adjusted for the negative impact of lower fuel surcharges (-2.1%), the segment’s underlying revenue growth was 6.5%, driven primarily by higher revenues from SMEs, but revenue growth remains uneven across Europe.
Average daily consignments grew 6.3%. Revenue per consignment was down 1.3% due to lower fuel surcharges and price pressures in some markets.
International Europe’s adjusted operating income for the third quarter of 2015 was €14 million, down from €22 million a year ago.
The decrease reflects transition and Outlook project costs (€2 million), the costs of introducing new services or upgrading existing ones, such as the expansion of TNT’s air network coverage and pre-noon delivery service in the Nordic countries. The stronger US dollar led to higher air network costs than prior year.
International AMEA segment
International AMEA revenues rose 6.1% to €242 million, mainly due to favourable currency effects.
Currency comparable revenue growth was -3.9%.
Adjusted for positive currency effects and the negative impact of lower fuel surcharges (-4.0%), the segment’s underlying revenue growth was roughly flat compared with last year. The segment’s revenues were affected by the drop in China’s exports, especially to Europe, as exports products make up for more than 70% of TNT’s revenues in Greater China, the segment’s largest unit.
Service quality continued to improve over last year, with on-time delivery performance 6 percentage points higher than in the third quarter of 2014. The segment also continued to grow revenues from SMEs.
As in the first half of 2015, International AMEA transported fewer but heavier consignments compared to the prior year. Average daily weights rose by 6.2%, which reflects the growth of higher weight Economy freight shipments and a continued trend of falling document volumes. Revenue per consignment rose slightly year-on-year (1.1%). Adjusted operating income increased by €7 million to €14 million, supported by cost management initiatives.
Domestics segment
The Domestics segment reported revenues of €615 million, down 2.7% from last year, as lower revenues in Brazil and Australia more than offset revenue growth in Europe.
Underlying revenue growth, excluding currency effects and the negative impact of lower fuel surcharges, was 0.6%. Revenues from SMEs improved year-on-year in all units, supported by better service quality. On-time delivery performance was 2 percentage points higher than in 2014.
Domestics average daily consignments increased by 2.5%. Revenue per consignment improved sequentially, but declined 3.0% year-on-year due to pricing pressures, lower fuel surcharges and customer mix effects. Adjusted operating income decreased by €26 million resulting in a loss of €3
million.
The decline is attributable to lower sales in Brazil and Australia, lower yields – particularly in France and Australia – and Outlook-related transition and project costs.
To adjust to the economic recession, Brazil management took cost-reduction measures, which helped protect margins.
TNT’s performance in France was affected by competitive pressures and higher B2C delivery cost.
TNT also faced competitive pressures in Australia, compounded by the drop in commodity markets, and the ongoing cost of modernising the Australian infrastructure. During the fourth quarter, TNT will ramp up activities at two new hubs in Melbourne and Brisbane to enhance service to customers and productivity.
Unallocated segment
The Unallocated segment consists of Other Networks (TNT Innight), Central Networks and corporate head office functions.
The segment’s revenues were up 8.5% year-on-year to €127 million. Adjusted operating income was minus €12 million, compared with minus €6 million in the third quarter of 2014. This result includes transition costs of €4 million related to the establishment of Global Business Services, a three-year, strategic Outlook project.
Guidance
"TNT reiterates its current financial year and longer-term guidance. TNT expects 2015 to be a challenging year of transition marked by the progressive ramp-up of new and upgraded facilities and other transformation projects, such as the outsourcing of IT. TNT anticipates restructuring charges of about €10 million in the fourth quarter of 2015."
