TNT Logistics' position in pecking order may soon be challenged

TNT has announced that it is to sell its logistics division to affiliates of Apollo Management, a US private equity firm, for E1.48 billion. While the sale of the business unit has been on the cards since 2005, Datamonitor’s Chris Morgan questions whether the new TNT Logistics will be able to take part in further market consolidation which is no doubt inevitable in the short term…

In December 2005, Dutch postal group TNT made known its intention to divest its logistics division in order to focus on its core competency of express parcels and mail delivery. TNT Logistics is the second-largest player in the global contract logistics market, although Datamonitor research shows the company had a market share of just under 2% in 2005 – indicative of how highly fragmented the industry is.

Even after the recent wave of merger and acquisition activity, market leader DHL-Exel held a market share of just over 5% last year, and the current market environment makes further consolidation inevitable. While the global logistics market holds a great deal of potential for major players, without the backing of its parent company, one must question whether TNT will have the financial clout to take part in any significant merger activity in the short term.

Selling the unit to a private equity firm rather than a logistics company had been on the cards for some time. Deutsche Post World Net has only recently acquired Exel in a multi-billion euro deal, and this will take some time to fully integrate. Meanwhile, UPS’ European logistics strategy is unclear, as the purchase price would use up vital funds that could be better directed towards expansion in the less mature, higher-growth markets in the Asia-Pacific region.

A further drain on cash would be necessary for the required investment to turn TNT’s logistics division around. For the first half of 2006, TNT Logistics’ revenue declined by 1%, while operating income fell by 4%.

Furthermore, Datamonitor research indicates that although the company has managed to dispose of its underperforming French division to Norbert Dentressangle, the company still has a relatively narrow source for its revenue stream – around two-thirds of which stems from Europe, while the notoriously cyclical automotive industry makes up around 40% of its income.

Nevertheless, TNT Logistics is the second-largest player in the global contract logistics market, although its low market share shows just how highly fragmented the industry is. Coupled with relatively weak margins in the industry and the increasing demands from customers to have a global network, further consolidation in the sector is inevitable.

Whether the new TNT Logistics will have the financial clout to take part in this in the short term is questionable, and the company may soon find its nearest rivals challenging its place in the pecking order.