Author: Archive

TNT announced the sale of Logistics for €1.48B ($1.85B). On August 23, TNT announced an agreement to sell its Logistics unit to Apollo Mgmt for €1.48B ($1.85B), predominantly for cash with €15M ($19M) in stock. There is no debt. We expect net proceeds of €1.2B ($1.5B) after deal-related expenses and tax deductions. TNT received 6.9x trailing 12 month EV/EBITDA vs. our 6.1x expectation.

Reducing 07 EPS by 10%. We are adjusting our numbers for the removal of Logistics, partially offset by an expected €1B ($1.25B) share repurchase to be completed by 2Q:07. We have made no changes to our operating assumptions for Mail, Express or Forwarding. Including the effects of both the lost Logistics business and the buyback, the deal is dilutive by €0.25/share ($0.30, or 10%).

Higher valued remaining business units offset reduction in EPS. We believe that TNT’s valuation should increase enough to more than offset the 10% reduction in EPS resulting from the disposal of Logistics. The remaining businesses, Mail, Express and Forwarding each should trade at higher multiples than the 6.9x trailing EV/EBITDA that TNT received for Logistics.

We still see the potential sale of Express as a reason to own the stock. We continue to believe that TNT’s Express business would be a potentially attractive acquisition target. With the expected liberalization of all European post offices over the next few years, we expect TNT’s core mail business to become a growth engine again and the timing seems closer for TNT to sell assets to create cash to grow the core business.

Reiterate Outperform and $42 target price. Eliminating Logistics from ‘07 numbers and adjusting for a share repurchase with the proceeds does not alter our underlying operating assumptions for the remaining divisions. We generally have had greater conviction in our Mail and Express estimates than Logistics, so earnings visibility has improved.

Bear Stearns acted as a financial advisor to Apollo Management in its announced acquisition of TNT Logistics.

Weakening home building trends. The most obvious sign of slowing freight demand has been in residential home building. Primary Forest products vols. moved by the rails (a good leading indicator for housing builds) were down 5% during 1Q:06, 14% during 2Q and are tracking down 17% QTD in 3Q. This note displays our estimates for direct and in-direct exposure to the U.S. residential housing market by the transports.

Generally Rails and Trucks have most exposure. On average the large cap rails and trucks derive about 9% and 7% of their total rev. from home building and related business. Within truck, Truckload derives an estimated 8%, LTL about 6.5% and R an estimated 4-5%. The express providers derive only about 1%-2% from home building and related businesses while the non-asset/asset light providers derive about 4%.

Rails have mostly direct housing exposure. Generally the rails have the most direct exposure as they ship both primary forest products (cut trees) and lumber and wood (processed). While flatbed truckers also move trees and lumber, most of the public TL carriers do limited flatbed movements. LSTR and UACL move freight on flatbed but mostly for non-residential building, which remains solid.

Indirect exposure somewhat greater for truckers and logistics providers. Transports also have indirect exposure to retailers that stock home products or manufacturers that build appliances or home components (see estimates below). In addition for TL, where smaller moms and pops generally move lumber, an indirect negative impact could be increased small fleet TL capacity.

GWR, RRA, CNI and JBHT have the most overall exposure. Exhibit 1 below demonstrates that GWR with about 21% has the most total exposure as a percent of rev. to housing followed by RRA at 16%, CNI at 17% and JBHT at 15%. On the other extreme FDX, TNT and UPS, we estimate have less than 2% exposure to housing.