Pressure on to make Exel the right fit

One date has been etched on the brains of Deutsche Post executives for years: December 31 2007.

It marks the end of the German postal group’s exclusive licence in its domestic market – its biggest source of profit. After that, German postal services will be opened fully to competition.

The threat posed by the deregulation was underlined this month when three of the biggest newspaper publishers in Germany teamed up to launch a group to tackle Deutsche Post in letter delivery.

They are promising a national network and cheaper prices. They are also looking for other publishers to join the venture.

Deutsche Post, however, has not been idle. Already, as the German market for letters of more than 100g has been opened up, the group has taken measures to trim its workforce and cut costs in its home markets.

But more importantly it has realised the need to diversify both geographically and in terms of market segments. “In the medium-term the company has to learn to stand on completely new legs,” says a senior executive.

In this respect it has been more far-sighted than most of its large European rivals. In part, this stems from its early flotation on the stock market in 1995, while competitors, such as La Poste in France and the UK’s Royal Mail, are still waiting to be set free from the state.

But the German group was unusually quick in seeing the need to internationalise. It bought Danzas in 1999, through which it is now the leader in the air freight market and second-placed in sea-borne freight.

The move that gave it greater global visibility – and allowed it to compete with the other global groups, such as Fedex and UPS of the US – was the gradual takeover over several years of parcel group DHL. Although it gained a strong brand name in Europe, DHL was all but non-existent in the US, a position Deutsche Post tried to rectify through its purchase of Airborne Express a year later.

But this is where shareholders become nervous about the current agreement to takeover Exel, the UK logistics company. The Airborne acquisition has been deeply problematic for Deutsche Post, leading to far deeper-than-expected losses and a shake-up in the management in the US.

Many investors believe the experience shows that while the German group is good at identifying the strategic sense of acquisitions, it is far less good at making them work.

Exel comes with similar positives and worries for the German group.

There is little doubt that strategically Exel makes a good fit for Deutsche Post. The UK company’s supply-chain management, or contract logistics, is an area in which Deutsche Post lags behind. Geographically, Exel’s strength in the UK and US complements the German group’s focus on Europe and Asia.

But some Deutsche Post investors and analysts are worried about the quality of Exel’s earnings, with its pre-tax margins lying under a third of the level of the German group’s, especially as the takeover value was at a 48 per cent premium to the share price before recent speculation. They also fret about the ability of the management to see through a takeover.