Deutsche Post CEO Faces U.S. Challenge Amid Expansion

Deutsche Post AG Chief Executive Officer Klaus Zumwinkel's plan to boost earnings by expanding the German postal service in the $65 billion U.S. delivery market may be dealt a blow by United Parcel Service Inc. and FedEx Corp.

Zumwinkel, 59, in March offered $1.05 billion to buy Airborne Inc. to establish a ground network in the U.S. and diversify revenue streams as earnings growth at home slows. The purchase by Deutsche Post, in which the German government has a 70 percent stake, needs U.S. regulatory approval and comes amid a Department of Transportation inquiry into complaints from rivals United Parcel and FedEx about German control of DHL Airways Inc.

“The situation in the U.S is a problem for Deutsche Post,'' said Reinhard Niebuhr, who helps manage the equivalent of about $5.6 billion at AMB Generali in Cologne, Germany. “The large competitors there are trying to push Deutsche Post out.''

Bonn-based Deutsche Post will probably report Wednesday that first-quarter net income rose 18 percent to 485 million euros ($547 million), according to the median estimate of seven analysts surveyed by Bloomberg News. Results from DHL International, part of Zumwinkel's $5 billion of acquisitions since 1998, were first incorporated in the results last year.

To win approval for his latest purchase, Zumwinkel, a former McKinsey & Co. partner who has led Europe's biggest postal service for more than a decade, has to convince U.S. regulators that Deutsche Post doesn't have control of either DHL Airways or the airline business of Airborne.

DHL's Role

Under the Airborne plan, air services will be spun off to shareholders and renamed ABX Air. DHL International, which also owns 25 percent of DHL Airways, will be its largest customer.

Rivals want the U.S. government to examine whether the planned purchase and the DHL Airways stake violate the intent of a U.S. law limiting foreign ownership to 25 percent.

“Our contention, which has been consistent since 1994, is that Deutsche Post is using monopoly funds to fund international expansion,'' said David Bolger, a spokesman for United Parcel. “We and FedEx have also contended that Deutsche Post controls DHL Airways in the spirit and substance of the law.''

The Transport Department has the power to revoke DHL Airways' foreign freight forwarding license if an inquiry by Administrative Law Judge Ronnie Yoder determines Deutsche Post is in violation of the law, said department spokesman Bill Mosley. An appeal is possible in a civil court. A decision is expected Sept. 2.

“There are some very powerful people in Congress who are down on DHL,'' said Dominic Edridge, an analyst at Commerzbank in London. “People who are being blase' about this don't realize how badly the ownership of Deutsche Post by the German government has gone down in the U.S.''

U.S. Opposition

Deutsche Telekom AG, at the time also controlled by the German government, in 2000 faced efforts by U.S. senators who wanted to thwart the phone company's purchase of VoiceStream Wireless Corp., a U.S. mobile-phone service provider. U.S. politicians argued that Congress never intended to let companies controlled by foreign governments own U.S. phone companies.

The purchase was eventually approved.

DHL Airways Chief Executive John Dasburg and an investor group plan to acquire Deutsche Post's stake in the business, aiming to defuse the issue of German government involvement.

“Any kind of arrangement where Deutsche Post gives up a stake (in DHL Airways) would help,'' said David Campbell, an analyst at Thompson, David & Company.

Deutsche Post was forced last year to repay 572 million euros in misused state aid after European antitrust regulators concluded the company improperly used the money to cover losses at its parcel-delivery business.

Government Subsidies

“UPS have said they feel they shouldn't have to compete with a competitor subsidized by the government,'' said Patrick Murphy, a former deputy assistant transportation secretary under President Bill Clinton.

Zumwinkel remains optimistic about plans to purchase Airborne as well as about the inquiry into DHL Airway ownership.

“We comply with U.S. law to the letter,'' he told reporters in Berlin last month. “I observe our competitors, operating a duopoly with an 80 percent share of the market, trying judicial tricks to keep other competitors out.''

The U.S. is not his only stumbling block. The company is facing a possible downgrade by Standard & Poor's because of concerns about pension liabilities. The rating company on Feb. 7 placed Deutsche Post on a list of European companies that may have their ratings cut on concern about pension-fund deficits. Deutsche Post has an A+ rating, or six steps above junk, on long-term debt.

Pension Shortfall

S&P treats underfunded pension obligations as debt-like, said analyst Martin Amann. Deutsche Post has a pension shortfall of about 6.1 billion euros, according to S&P.

Zumwinkel has said he expects a downgrade of “one or two notches.'' The downgrade will have little impact because the company has “low debt,'' he added.

Some of Deutsche Post's shareholders don't agree and expect a rating change to hurt the company in other ways.

“Any change in rating has a direct effect on the share price,'' said AMB Generali's Niebuhr. “A rating cut is very significant.''

Deutsche Post shares fell as much as 23 cents, or 2.1 percent, to 10.65 euros and were down 0.5 percent at 10:25 a.m. in Frankfurt. The stock has gained 8.6 percent this year, making them the 12th-best performer on the 30-member DAX Index, which has gained 3.5 percent.

Increasing Profit

To boost investor confidence and increase profit, Zumwinkel last year set out a plan to raise earnings before interest, tax and amortization to 3.1 billion euros by 2005 from 2.4 billion euros last year by cutting the number of mailboxes and reducing the workforce.

“We'll have to see what they have to say to investors about the results of the cost-cutting program,'' said Henning Gebhardt, who helps manage about 50 billion euros at DWS Investment. “The next few months will tell.''

The yield on Deutsche Post's 750 million euro bond maturing in 2012 rose 0.4 percent to 4.5 percent, or about half a percentage point more than similar sovereign debt. The yield is little changed from the beginning of the year.

Last Updated: May 6, 2003 04:49 EDT