DHL Restructuring – Wheels in Motion But Likely to Take Some Time
RESTRUCTURING IN THE U.S. Following the recent USD 784M write down related to its Americas Express business, 600 recently announced layoffs in the U.S., and change in DPWN’s CEO, several European and U.S. newspapers have reported that DHL could announce either the sale or restructuring of its U.S. business at its parent DPWN’s analysts meeting in Bonn on March 6th.
BACKGROUND ON DHL’S PROBLEMS IN THE U.S. DHL bought Airborne in late 2003 and over the next few years merged its existing U.S. import/export business in with Airborne’s predominantly domestic express business. However, DP has never been able to realize its expected cost synergies and has reported an estimated USD 2.8B in losses in North America over the past 4 years.
WHAT ARE DHL’S OPTIONS? For anti-trust reasons we don’t believe that either UPS or FDX could buy DHL’s N.A. assets or complete book of business. More likely DHL will seek to further stem losses by reducing its commitment in the U.S. through cost reductions/restructuring and partnerships (outsourcing some line-haul and P&D), while making it clear they intend to remain in the U.S. Look for it to reduce terminals and push more freight towards the ground.
WHAT IS THE TIMING? DHL is in a tough position because if customers believe there is even a chance it will exit the U.S., DHL’s competitive position will be compromised. Thus action needs to be swift, but DPWN tends to be contemplative and current Teamster issues likely prevent a major restructuring before April or May. At this point we expect modest restructuring efforts to be announced on March 6th with a clear indication of remaining in the U.S. and more restructuring to come.
WHAT DOES THIS MEAN FOR UPS AND FDX? Longer term this is a positive for both FDX and UPS as the low cost, low price competitor is likely going to end up a smaller threat. However, it might not feel that right away as DHL discounts in the near term to maintain existing customers in the face of impending restructuring.
INVESTMENT CONCLUSION: UPS and FDX are up 0.5% and 1.3%% YTD, compared to the S&P 500 down 9.6%. Currently UPS is trading at 16.0x and 8.7x forward rolling EPS and EV/EBITDA or about 22% and 18% below its five year averages. FDX is currently trading at 14.2x and 5.9x forward rolling EPS and EV/EBITDA or about 15% and 11% below its five year averages. We don’t expect DHL’s meeting to provide an instant catalyst for either FDX or UPS, but rather to be evidence of further gradual changes to come at DHL over the next several months. While DHL and the Teamsters have reached a tentative national agreement, details of which will be presented next week, we don’t expect a major restructuring likely before that contract is ratified some time in April or May. We also don’t see DHL pulling completely out of the U.S. and we don’t believe either UPS or FDX could buy it. Accordingly, while gradually we expect both FDX and UPS’s market share position and pricing in the market to improve because of DHL’s likely cost savings enactments, we view that gradual market share improvement as icing on the cake for our UPS Outperform rating and as insufficient by itself to get more excited about FDX at this point. UPS remains rated Outperform and FDX Peer Perform.
Below we provide great detail on DHL Americas current estimated market share relative to UPS and FDX as well as background on the former Airborne and how it has evolved into the current mess for DHL. Further below we outline a few scenarios of the potential benefits to UPS and FDX from increased volume if DHL were to lose market share over time from restructuring in the U.S. However, we expect DHL’s restructuring benefit to FDX and UPS over time to be more about improved yields for the market than about volume.
