A few more thoughts on TNT Express – Implied probability of deal happening is only 19%

Yesterday’s post was of course only a first step towards a potential “special situation” investment.

In order to decide if this is actually an interesting investment, one would need to come up with

A) some more considerations with regard to timing
B) at least a rough idea about intrinsic value

With regard to timing, I think it makes sense to look at Rhoen Klinikum, where there was a similar situation:

On April 26th, Fresenius offered 22,50 EUR per share from an “undisturbed” level of 14.76 EUR the day before. Then, when doubts came up, the stock went down to around 16 EUR before once again climbing to around 20 EUR, before then the deal fell apart. Interestingly, the current share price seems to have a floor at the previous undisturbed level.

For TNT Express, the truly “undisturbed” price the day before the offer was 6,34 EUR, so the current price is around 10% higher than that level.

Just as a side remark:

There were a couple of articles which said that there is now a 50/50 chance of the deal happening, like here.

However at current prices(6.95 EUR) we can relatively easily calculate the implied probability of the deal happening:

Undisturbed price: 6.34 EUR
Current prcie: 6.95 EUR
Offer price: 9,50 EUR

So the implied probabality of the deal happening can be calculated the following way:

(6.95-6.34) / (9.50-6.34) = 19.3%.

Anyone who thinks that there is really a 50/50 chance of the deal happening should buy now as the expected share price under this assumption should be 7.92 EUR (6.34 + (9.5-6.34)/2).

Going back to timing: What we haven’t seen here is a upmove of the stock like we have seen with Rhoen. So far we only saw the price going doen and the implied probability of the deal happening decreasing.

B) intrinsic value

This is somwhow difficult. The 9,50 EUR is a “private market” value, maybe including a premium for synergies.

TNT Express since its spin off has yet to prove that they can achieve margins like their competitors. Based on Q3 numbers, they are curently heading to something like 220 mn “operating income” or EBITDA for 2012 which equals an “operating margin” of only 3%.

UPS for example has an operating margin of 11.4%, FedEx of 7.8%. Deutsche Post has an ~9% EBIT Margin in the Express segment. So TNT has definitely some room to improve.

If we assume 8% operating margin, TNT would show ~600 mn EBITDA. Current EV is 3.5 bn, potential EV/EBITDA ~6.

This is much lower than UPS (10x EV/EBITDA) but higher than Fedex (4.9x). Deutsche Post is at 5 times EV/EBITDA.

So at current prices and assuming quite a turn around, TNT Express is not really cheap. So any investment would be a pure “Merger arbitrage” or “control premium” inevstment which might or not work out.

No action yet.

Edit: During writing this post, the share price jumped some 3.5% compared to yesterday, is this the first leg of the rebound ?…..

• benny_m

War halt heute schonmal um die 20% günstiger zu haben…

Das Problem ist, dass es für TNT alleine schwierig wird zu überleben…

Man kann TNT nicht mit Rhön vergleichen 😉

• Ja, Tante ist ein deutlich heisserer reifen als Rhön. Aber was für die watchlist.

• Scheint doch jetzt interessant zu werden, zu dem Preis von heute, oder ?

• benny_m

2012 war echt dein Jahr…

Da geht ein Zock mal nicht auf und Du hast die Finger davon gelassen…

-41% ist echt nett … Für einen Tag 😀

• M&a arbitrage ist auch ein echt heißes Eisen. Mmi

• Today UPS reports that European regulators have not approved the fusion of UPS and TNT.

• Danke. Gluck gehabt. 🙂

• Nate,

thanks for the comment. Good point. If they don’t make money now in South America, then when else ?

mmi

• Nate Tobik

I owned TNT Express for a while, purchased low after the spin and sold on the merger news. I lucked out!

I was happy to sell, very happy. The management just doesn’t seem capable of handling a turnaround. The South American operations are a black hole, and expenses seem out of control, the operating margin is just the symptom. I remember there were a lot of “one time” events as well.

The PostNL investment angle seemed interesting as well. I looked into that but the debt, dying business and legacy costs kept me away. No margin of safety in either.

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