Why FedEx's Newest Deal Looks Good

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FedEx (NYS: FDX) has bagged yet another small European company as it tries to counter United Parcel Services' (NYS: UPS) recent acquisition of TNT Express.

When UPS was in talks to buy TNT for a whopping $6.8 billion, many analysts watched FedEx closely for a reaction or a counter-bid. FedEx did not give in to this temptation, fully aware that it was in no position to compete against its bigger rival in a deal that involved a large price tag.

A different strategy
FedEx was instead on the lookout for small to midsized, privately held companies in a bid to expand its small 3% market share in Europe (as compared to UPS' now-17.3%). After recently announcing the finalization of a deal to buy a midsized Polish company named Opek Sp.z.o.o., FedEx now plans to follow it up with the acquisition of French package delivery company TATEX. Consolidation in France seems to make sense as Paris became FedEx's biggest business hub outside the U.S., following the company's foray into the country way back in 1985.


Fitting piece
TATEX boasts a strong nationwide network with 35 shipping centers, including six regional hubs, and has a noteworthy 19 million shipments carried annually through its extensive domestic ground-based operations. This is likely to benefit FedEx, which is in dire need of expanding its ground shipping business, not only to tap the growing market, but also to put up a worthy fight against UPS.

The package delivery industry, of late, has been suffering from a slowdown in international shipping as growth in China weakens and uncertainty continues in the European economy. This has hit the profitability of companies such as UPS and FedEx in recent quarters. In the midst of all this, however, there has been robust intracontinental shipping. In fact, UPS reported more than a 5% increase in its intra-European shipping during its last quarter, slightly higher than its overall revenue growth.

This is why the TATEX acquisition looks promising. The amount FedEx will pay for this company remains undisclosed, but what we do know is that TATEX can add $194 million annually to FedEx's top line, as compared to a far smaller $70 million expected out of the Opek acquisition.

The Foolish bottom line
FedEx seems to be taking small but effective steps toward organic growth, even as it concentrates on expansion of its ground shipping business. FedEx's strategy of acquiring smaller companies is less risky vis-a-vis UPS' larger acquisition. This is one stock I will surely keep a close watch on. If you feel like doing the same, add FedEx to your watchlist now and stay updated on all the analysis on this company for free! Click here.

At the time this article was published Navjot Kaur does not own shares of any of the companies mentioned in this article.Motley Fool newsletter serviceshave recommended buying shares of FedEx. The Motley Fool has adisclosure policy.
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