High hurdles for DP-Airborne deal

High hurdles for DP-Airborne deal
>by Jaret Seiberg Posted 04:38 EST, 28, Mar 2003
>
>Deutsche Post World Wide AG must negotiate a tricky political and
>regulatory environment if it hopes to secure approval for its proposed
>$1.05 billion acquisition of Airborne Inc. The deal raises a host of
>political issues, including state-sponsored monopolies, national security
>and free trade. The German government owns a majority stake in Deutsche
>Post, which has led to charges that the postal giant is using monopoly
>profits from German mail delivery to subsidize U.S. operations.
>
>Also in question: whether Deutsche Post and its U.S. unit, DHL Worldwide
>Express, can structure the deal to avoid a U.S. ban on foreigners
>controlling domestic airlines, including cargo carriers.
>
>Virtually ensuring that the deal will become politicized is the involvement
>of United Parcel Service Inc. and FedEx Corp., which have waged 10-year
>campaigns against Deutsche Post. "We feel Deutsche Post is using their
>government-granted postal subsidies to implement their international
>acquisition play book," says UPS spokesman David Bolger. "They are
>subverting U.S. law in the DHL deal and they want to replicate that with
>Airborne.."
>
>Both cargo companies filed motions March 25 with the Department of
>Transportation, which could slow the deal. UPS called for a public hearing
>on whether the merger is legal, while FedEx asked the agency to void a
>prior decision that Deutsche Post is relying on to justify the Airborne
>deal.
>
>On Capitol Hill, at least one prominent lawmaker also is pledging to oppose
>the deal. Sen. Jay Rockefeller, D-W.V., threatened Tuesday to block the
>merger. "If the [Bush] administration is not prepared to take steps to
>protect American businesses from unfair competition by foreign government
>monopolies, legislation may be necessary," Rockefeller warned in a
>statement.
>
>The deal also faces significant regulatory hurdles. Federal law bars a
>non-U.S. owner from controlling more than 25% of voting stock or 49% of the
>equity in a U.S. airline. To circumvent this barrier, Airborne says it
>plans to spin off its air operations to ABX Air Inc., an independent,
>public company that would be completely owned by current shareholders. Such
>a move, which appears to comply with the foreign ownership limit, mirrors
>Deutsche Post's strategy for securing federal clearance for its 2000
>acquisition of DHL's U.S. operations.
>
>The legal picture has recently changed, however. A report by the Department
>of Transportation's inspector general, Kenneth Mead, said future
>citizenship investigations of deals similar to DHL should be subject to
>formal review rather than the informal process used previously.
>
>The formal process should include a mechanism for DOT to review
>confidential documents, formal notifications for the start of citizenship
>reviews, provisions for third-party comments and limited access for third
>parties to documents, Mead says.
>
>Such a process would be similar to the Federal Communications Commission's
>procedure for reviewing media mergers, and it would likely take longer to
>complete than the more informal system.
>
>Regardless of what kind of review DOT conducts, Deutsche Post must show
>that it would not control Airborne's air assets. The biggest issue may be
>whether the contracts between ABX and Deutsche Post are so significant as
>to give the foreign company actual control over air operations.
>
>Also of interest will be the expected percentage of ABX's business that
>will come from Deutsche Post. In the 2000 DHL deal, the DOT required the
>airline unit to hire a marketing officer to boost outside business hauled
>by the carrier. Yet the inspector general noted that, despite the hiring,
>the air unit continues to conduct 90% of its business with DHL. This could
>suggest the government would seek greater assurances that ABX would seek
>outside business.
>
>Deutsche Post and DHL also could have trouble because the airline will be
>run by a current senior Airborne official, which could run afoul of
>measures that bar a non-U.S. citizen from exercising control over a carrier
>through a U.S. citizen who is a family member or business associate.
>
>Unclear is whether Airborne and DHL will have a problem over credit
>agreements. Mead's report notes that bank guarantees could effectively give
>a foreigner control over a U.S. airline. Yet neither Airborne nor DHL have
>disclosed whether Deutsche Post will guarantee any ABX's debt. The 2000 DHL
>deal included some debt guarantees.