Exel surges on talk of bid from UPS

Shares in Exel PLC surged over 4 pct in midmorning deals on speculation the UK transport logistics company could receive a takeover bid from US postal giant UPS, dealers said.

Dealers argued such a deal would be logical and noted there are rumours circulating that Deutsche Post could also be eyeing Exel.

Analyst Andrew Beh at ING said Exel would be a great fit for both UPS and Deutsche Post. Beh highlighted a report he published back in Nov 2004 which noted the potential for consolidation in the support services sector, with Exel specifically mentioned as a takeover target.

ING pointed out consolidation in the sector would most likely involve quoted companies that have been awarded mail licences, such as Hays DX or Business Post Group. Yet the broker added that Exel, as a specialist logistics provider, is looking increasingly isolated.

In short, ING believes the most likely tie-ups will involve Deutsche Post World Net (DPWN)/UPS/Kuehne & Nagel and Exel/Wincanton.

Looking at potential competition issues, Exel could not combine with another UK-based operator as this would likely incur anti-trust actions, noted ING. Yet the broker highlighted that Exel’s continental exposure would be too small to cause a problem for potential bidders and DPWN’s and UPS’s UK businesses are too small to be of concern.

Despite the potential upside for UPS from involvement in a deal, Andrew Beh pointed out that the US group has its own issues at the moment, after cutting its fourth quarter guidance in December, blaming a sharp drop in domestic shipping volumes.

Beh noted that UPS’ rival Fedex reported no such volume problems, leading some to worry about the state of UPS’ business.

On the other hand, Beh also noted this could be a good time to make a move on Exel, given that Deutsche Post is busy with its acquisition of KarstadtQuelle AG’s logistics operation. Moreover, some traders said given the guidance cut at UPS, management could be keen to show they are actively trying to turnaround the group’s fortunes by seeking economies of scale with Exel.

Exel has around 500 mln stg of debt, which is non prohibitive to any deal, argued traders.

As for a potential take-out price, Andrew Beh estimated Exel could be bought for around 925 pence per share, though he noted this would be in a non-competitive bid situation.

ING has a ‘buy’ rating on Exel.

At 10.51 am, shares in Exel were 34 pence higher at 780-1/2.