FDX/Kinkos Initial Thoughts

· FDX announced its intention to purchase Kinko’s for $2.4 billion in cash from Clayton, Dubilier & Rice. The deal is expected to close in C1Q:04.
· Kinko’s is privately held. Clayton Dublier owns about 75% of Kinko’s and it is not clear if FDX is purchasing that 75% or all of the stock of Kinko’s.
· The press release states that Kinko’s has about $2 bill. of revenue and 1,200 stores. No profitability figures for Kinko’s were released. The press release states that FDX expects the deal to be neutral to earnings during F04 and accretive (no range given) to F05 EPS (beginning June 04).
· Kinko’s is known as a well-run operation. Its closest public comparables typically run with EBIT margins in the 4%-6% range, which is below FDX’ current 7.5% EBIT margin as well as FDX stated goal of a 10% EBIT margin. Again, we have not seen financials on Kinko’s so we do not know its EBIT margins.
· The purchase of Kinko’s seems at first glance reactive to UPS purchase of MBE in Spring 2002. It also seems like a steep price for a non core business given that FDX paid only $2 billion for Caliber (including RPS now FedEx Ground, Viking Freight, Roberts and Caliber Logistics) in 1998.
· UPS purchased MBE for about $180 million. MBE has about 4,500 stores. UPS bought the franchise but not the franchisee’s while FDX has seemingly purchased at least the majority of the stores as well as the franchise given the tremendous amount of revenue FDX has announced it has purchased.
· While MBE was historically a multi-shipping platform that included the use of FedEx, UPS, the US Postal Service and many other shipping alternatives, FedEx has been Kinko’s exclusive shipping provider since 1988.
· FDX noted in its press release that only 134 out of Kinko’s 1,200 stores offer full service staffed counters (as opposed to drop boxes or counters with only express or ground products) which will provide FDX with significantly greater exposures in these stores.
· We expect to hear more about potential synergies during FDX’ conference call today at 10am EST 973-935-8505, with a replay number of 973-341-3080.

The Research Analyst(s) who prepared the document / email hereby certify that the views expressed in this document / email accurately reflect the analyst(s) personal views about the subject companies and their securities. The Research Analyst(s) also certify that the Analyst(s) have not been, are not, and will not be receiving direct or indirect compensation for expressing the specific recommendation(s) or view(s) in this report.
Edward M. Wolfe
Lead Analyst Name