UPS Deal Will Deliver Earnings Boost: Analysts

NEW YORK ( TheStreet) -- United Parcel Service ( UPS) is set to see a long-term earnings boost after making an international mail delivery push with a $6.8 billion all-cash acquisition of Dutch package shipper TNT Express, according to industry analysts.

After upping a previous failed bid for TNT Express, UPS may become the largest shipper in Europe as it grows international mail delivery revenue and finds cost savings that make more upbeat about the earnings of the largest public mail delivery and logistics company in the U.S.

On news of the deal, JPMorgan analyst Thomas R. Wadewitz raised his UPS price target to $92 a share from $88 and moved his rating of the stock from "neutral" to "overweight" on an expected rise operating profits that will lift UPS's long-term earnings per share.

"We expect significant earnings per share accretion in 2013 and 2014 from the TNT Express deal and we also view it as a strategic positive in terms of boosting UPS's global footprint," wrote Wadewitz in a Monday note. He forecasts that the deal will add 48 cents to UPS's 2013 and 2014 earnings per share, pushing this year's total to $5.75. The acquisition is also expected to drive $400 million in cost savings.

"In our view, the deal is a significant strategic positive for UPS because it will vault UPS from a #3 position in most European markets to #1 or #2 positions. We would expect the deal to strengthen UPS's global small package network and also significantly broaden its base of European customers." Wadewitz adds that the deal will strengthen UPS's small package network and will help thje company further benefit from an improving U.S. economy.

If the deal were to close as is expected by management in 2012, it would be UPS's largest ever deal, significantly eclipsing a $1.2 billion acquisition of speed delivery service Overnite Corporation in 2005. With TNT Express, UPS would also grow its revenue to $60 billion from $53 billion, while pushing international earnings to 36% of overall revenue from present levels of 26%, according to a press release.

"With this combination, both U.P.S. and TNT Express will significantly enhance their ability to serve our combined customers' complex global logistics needs," said UPS chief executive Scott Davis in a statement. "The additional capabilities and broadened global footprint will support the growth and globalization of our customers' businesses."

In Monday trading UPS shares rose over 3% to $81.03, while FedEx shares rose under 1% to $94.99. Year-to-date, FedEx shares have outpaced UPS, posting a near 14% gain to UPS's 9% 2012 rise. Those 2012 gains have helped UPS and FedEx shares to post positive stock returns in the last 12 months.

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To get a deal done, UPS raised its offer price for TNT Express to 9.50 euros a share from 9 euros, which was rejected by TNT's board in February. Expectations of a TNT Express deal lingered for almost a year after the unit was spun from the Dutch mail giant TNT last May.

Since that spinoff, TNT Express shares suffered from weak Latin American and Asian earnings that pushed the company to a loss of 270 million euros in 2011. Some TNT Express investors like activist investment fund Jana Partners saw the company's struggles as a sign that drastic change like a sale was needed. In December, the fund nominated two hostile directors to TNT Express's board in as proxy campaign to push for a sale.

TNT Express shares have rallied nearly 50% since the company acknowledged that it had been in deal talks with UPS in February.

At the current deal price, UPS is expected to be able to pay for TNT Express with two years of its free cash flow, making it an earnings positive deal even if divestitures, regulatory concerns and integration costs are significant.

Sterne Agee analysts expect UPS to earn $3.2 billion in free cash flow this year and $3.8 billion in fiscal 2013. Synergies with UPS's worldwide fleet will make the deal earnings positive, according to Jeff Kauffman of Sterne Agee, who calculates that the move may be worth up to 13 euros a share for UPS.

Benefits of a TNT Express acquisition wouldn't have been as present for UPS's main U.S. rival FedEx Corporation ( FDX), according to Kauffman, signaling that a long-rumored rival offer may not come. Meanwhile, FedEx's cash earnings abilities would make a higher bid hard to fund.

"We only calculate FedEx generating FCF after dividends of $(150) million and $420 million, implying that if FedEx responded to an E9.50 bid by UPS with a bid over E10, such a transaction would take as much as 7+ years of Free Cash Flow to pay down," noted Kauffman. He rates UPS shares a "buy" with a $110 price target and also gives FedEx shares a "buy" rating.

Still, even with an optimistic first response from analysts and investors, significant risks to the deal remain. UPS forecast that the implementation costs of the deal could total $1.3 billion over four years. The company will draw the bulk of its cash on hand and also issue new debt to pay for the deal. Atlanta-based UPS said it would use $3 billion in cash out of a total of $4.27 in cash in short term investments for the deal and issue new debt to pay for the remainder.

Overall, analyst give UPS an average price target of $88.39 a share, according to data compiled by Bloomberg. Eighteen analysts rate shares a "buy," while another 8 give the company a "hold" rating. Those analysts expect UPS to see its revenue climb to $55.9 billion, netting a $4.7 billion profit in 2012 that's expected to grow in 2013. Analysts give FedEx shares a price target of $104.47, according to Bloomberg data.

For more on UPS shares see The #1 recession proof portfolio that will make you richer and the most bought industrial stocks among investment funds.

UPS was advised by UBS ( UBS), Morgan Stanley ( MS) and Bank of America Merrill Lynch ( BAC). Goldman Sachs ( GS) and Lazard ( LAZ) gave TNT Express advice on its sale.

For more on Goldman and Lazard shares, see 2012 deals hinge on Goldman's idea of fairness and a widening performance gap on Wall Street.

Written by Antoine Gara in New York.