Fedex and UPS expected to fight DHL-Airborne merger

FedEx Corp. and United Parcel Services are not expected to stand silently by while DHL Worldwide Express consummates its $1.05 billion takeover of Airborne.

FedEx and UPS have already pushed the Department of Transportation to look at the ownership of DHL. The companies claim that the DHL is really just an arm of the German government.

"Both UPS and FedEx are going to object to DHL's acquisition of Airborne's ground base assets under the cover of regulatory and anticompetitive grounds," said analyst Peter Jacobs, of Ragen MacKenzie, a division of Wells Fargo Investments, who does not own any Airborne shares.

Federal law restricts foreign ownership of a U.S. airline to not more than 25 percent. But FedEx and UPS have claimed that DHL Airways, a unit of DHL Worldwide Express (the U.S. subsidiary of DHL), is owned and controlled by Deutsche Post, which is 70 percent owned by the German government.

"We don't think [DHL] should be allowed to expand in the U.S. until the DOT completes its investigation," FedEx spokeswoman Kristin Krause said Tuesday. UPS declined comment.

Initially, during the fall of 2000, the DOT felt that DHL met all the requirements for full U.S. citizenship. But at the urging of some powerful congressional bigwigs, the agency is again looking at the issue.

Rep. Don Young, R-Alaska, chairman of the House Transportation and infrastructure committee, asked Inspector General Kenneth Mead to review how the DOT analyzes an air carrier's citizenship. Mead, in a March letter, said it identified a number of issues the DOT should have considered.

The DOT is again reviewing DHL's ownership and has asked for comments on issues raised by Mead's letter. But so far, the Airborne takeover has not come before the DOT, a spokesman said. "The review of DHL is of DHL," the spokesman said. "At this point there is not any investigation of Airborne."

The case involving the DOT has been ongoing for more than two years but many analysts do not believe that UPS and FedEx have a legal leg to stand on.

FedEx and UPS claim that a complex web of subsidiaries hides Deutsche Post's ownership of DHL.

"FedEx and UPS are not happy about this," Ragen MacKenzie's Jacobs said. "The bottom line is that UPS and FedEx have substantial market share in the U.S. They see a real competitive threat from DHL if DHL does get a foothold in the U.S. marketplace."

Some believe DHL's buy of Airborne will have problems. "The DOT is really being pushed pretty hard to continue to look at DHL seriously," said John Ash, a managing director of Global Aviation Associates, an aviation consulting group in Washington. "It could get messy."

FedEx and UPS have very powerful lobbying arms. Sen. Bill Frist, R- Tenn., who represents FedEx's home state and Sen. Zell Miller, D-Ga., representing UPS' headquarters city of Atlanta, could not be reached for comment.

Sen. Jay Rockefeller, D-W.Va., who sits on the Senate Commerce Committee, criticized the Airborne-DHL deal and called on the Bush administration to block it.

On the House side, a spokesman for Rep. John Mica, a Florida Republican who heads the aviation subcommittee, said that nothing was being considered presently regarding the DHL-Airborne merger.

The deal

DHL agreed Tuesday to pay $21.25 a share in cash for Airborne's assets. Once the deal closes, Airborne's air operations would be separated from its ground services and spun off into an independent company called ABX Air. Airborne shareholders would own the company.

The U.S. ground operations of Airborne and DHL would operate under the DHL brand. The transaction is expected to close during the summer, the companies said.

"This combination will strengthen DHL's presence in the U.S., and our global presence will bring significant benefits to Airborne customers," said Uwe Doerken, CEO of DHL Worldwide."

To get past the 25 percent foreign ownership limit, ABX Air would operate as an independent public company with its own board of directors, management and independent auditor. ABX Air and DHL would enter into "arms-length commercial agreements" where ABX would provide DHL the air transportation services it has previously supplied.

DHL would not own any shares in ABX Air, which would trade over the counter and would not be listed on an exchange, Airborne Chairman and CEO Carl Donaway said on a conference call.

FedEx and UPS are expected to ramp up competition if the DHL-Airborne merger does go through. The combined company would have capital and resource to leverage their value in the market, Donaway said.

Airborne's costs of shipping have historically been 10 to 20 percent less than FedEx.

"They will compete and try to rationale pricing," wrote analyst Rick Patterson, of UBS Warburg. "Pricing will fall if merger goes through."

News of the deal caused shares of Airborne Inc. to jump 10 percent, or $1.82, to $19.87 Tuesday.

Opposition seen

UPS and FedEx have claimed that Deutsche Post is unfairly using revenue its gains from its monopoly of the German postal system to expand.

Airborne's Donaway countered that UPS and FedEx have their own "duopoly" in the US, with a 79.2 percent share of the express delivery market. Airborne has about 19 percent while DHL has less than 2 percent of this category, analysts said.

In the ground delivery business, where it takes three to seven days to ship a package, UPS has 60 percent of the market, the U.S. Postal Service has 20 percent and FedEx has 15 percent. "Airborne has 5 percent but they are growing pretty quickly in this area," said Jacobs, of Ragen MacKenzie.

Brussels-based DHL is the biggest global overnight shipper, servicing 120,000 destinations in more than 220 countries. But the company ranks third in the United States behind UPS and FedEx, with a less than 2 percent of the overnight domestic market.

Analyst Arthur Hatfield of Morgan Keegan says the merger is a good deal for Airborne shareholders. At $21.25 a share, "it's a fair price," he said.

Hatfield doesn't think UPS and Memphis-based FedEx have a sound legal position. "The deal is structured where it complies with U.S. law," he said.

Goldman Sachs advised Airborne in the deal, and Deutsche Bank represented DHL.

Shares of FedEx added 42 cents to $55.88 while UPS rose 57 cents to $58.35.

Copyright 2003 CBS Marketwatch Source: Financial Times Information Limited.