Eyes on TNT's express as mail up for grabs

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TNT/ (DEALTALK)
* Mail spin-off makes express sale easier

* Sale of mail unit poses challenges

* TNT may end up listing mail

By Greg Roumeliotis

AMSTERDAM, April 27 (Reuters) - With Dutch post and logistics group TNT exploring ways to sell equity in its troubled mail unit, investors are more focused on how the process will make a bid for its express business more likely.

Shares in Europe's second largest mail and delivery company have risen more than 8 percent since April 8, when it announced it was carving out its mail unit as it considered a possible initial public offering (IPO) or partnership.

Analysts have attributed the share rally to investors betting that separating TNT's mail from its express business will increase the chances of an offer from U.S. rivals FedEx and UPS for express. The buyer of TNT's express business would get an edge in Europe over Deutsche Post's DHL.

TNT's management has already held strategy talks with an activist shareholders' consortium comprising Jana Partners and Canadian asset manager Alberta Investment Management Corp about separating out express, which sees significant share upside in separating out the more lucrative express division.

"There have been multiple approaches in the past from FedEx and UPS. The reasons for them to try again now have become more compelling," said a source close to the consortium. "TNT has been doing well with its plans but now they have to execute."

UPS and FedEx were last rumoured to be interested in TNT's express unit in 2008 but talks fell through as it became clear there were challenges in taking on the mail business as well. Separated from mail, the sale of express would be easier.

"At a stroke, any acquirer (of TNT's express business) could become one of the pre-eminent global express carriers," Goldman Sachs analysts wrote in a note this month.

They estimate the value of TNT's express enterprise is between 7.5 and 10.5 billion euros based on projected 2011 earnings before interest, tax, depreciation and amortisation (EBITDA) multiples of between 8.5 and 12 times.

Analysts see potential for TNT's shares reaching the high twenties from the current level of around 23 euros on bid talk.

The stock now trades at 13.4 times 12-month forward earnings, the same as rival Deutsche Post, according to Thomson Reuters StarMine, which weights analyst expectations based on their track record.

MAIL SALE

While TNT Chief Executive Peter Bakker has said he is open to offers on express, he has downplayed the likelihood of a successful bid, and is looking at ways to release value by spinning off the mail unit, whose enterprise value, according to analysts, is estimated at up to 3.5 billion euros.

Increased competition due to mail liberalisation in Europe and a rise in electronic communications have tested TNT's faith in the combined mail-express model. Declining postal volumes will make a private sale of a stake in mail challenging.

"In road shows, TNT management has indicated they would like to sell a minority stake privately, but I think any trade or private equity buyer would seek operational control and may need special voting rights," said an institutional investor source.

"Maybe they are hoping for a pension fund or sovereign wealth fund to come out of the shadows and make an offer."

CVC Capital Partners has emerged as a private equity player in mail in Northern Europe. It owns 49.9 percent of Belgium's De Post - La Poste. In the past, it has owned a stake in the Danish postal service and has made an offer for Britain's Royal Mail.

A source close to Deutche Post said it was not interested in TNT's mail unit. France's La Poste and the Belgian mail operator have also been mooted as possible candidates but may be discouraged by TNTs' pessimism on European mail liberalisation.

"TNT has acknowledged that mail liberalisation in Europe has reached its limits," said ING analyst Sjoerd Ummels. "Indeed, if you look at operational efficiencies between TNT's Dutch and German mail business, they are quite limited."

Added to the challenges of ever-declining mail volumes a strategic buyer would face is uncertainty about the number of mail delivery days in the Netherlands and cut-throat competition on prices from smaller Dutch rivals Sandd and Selektmail.

Sandd, owned by Dutch investment firm Trimoteur, NIBCapital Principal Investments and Fortis Private Equity, put itself up for sale last year.

But Sandd Chief Executive Gert-Jan Morsink told Reuters earlier this month the company was no longer actively exploring a sale, a decision that highlights the challenges of the domestic market.

"An IPO remains the base case (for mail), but given shareholder scrutiny, TNT is likely to explore all the alternatives," said an investment banker at a Dutch bank.

A TNT spokesman said all options for mail were still being considered. FedEx, UPS, Deutsche Post, La Poste and De Post - La Poste declined to comment, and CVC Capital Partners did not respond to a request for comment. (Additional reporting by Quentin Webb in London, Helen Chernikoff in New York, Maria Sheahan in Frakfurt, Matthieu Protard in Paris and Ben Deighton in Brussels; editing by Karen Foster)