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Why Fedex Corporation Inc’s Takeover Of TNT Express NV Makes Me Want To Buy Royal Mail PLC

Markets awoke this morning to news that Fedex Corporation (NYSE: FDX.US) had reached a “conditional agreement” to purchase European courier TNT Express for €8 per share. This sum equates to a jumbo €4.4bn, or £3.3bn, and represents a 33% premium to the Dutch firm’s pre-Easter closing price.

This is not the first time TNT Express has drawn admiring glances from its sector rivals, the firm having been the subject of a €5.2bn takeover bid by United Parcels Service two years ago. But while UPS failed in its bid due to competition concerns from the European Commission, FedEx’s relatively low continental footprint should allow it to hurdle such qualms relatively comfortably.

Parcels sector set to explode

Fedex’s move today comes as no surprise, and I expect consolidation across the sector to ramp up a notch or two in the coming months and years. Although TNT Express continues to suffer the effects of intense competition — total revenues slipped 3.2% in 2014, to €6.7bn — the promise of surging package volumes looking ahead should turbocharge turnover growth.

Indeed, total parcel traffic is likely to head northwards as the popularity of internet shopping clicks through the gears, helped by technological innovations like purchasing on mobile devices and improved services by retailers.

And with improving macroeconomic conditions in TNT Express’ core European marketplaces boosting consumer spending power — latest data showed eurozone retail sales rise 3.7% on-year in January, the biggest jump for nine years — the stage is set for the top line to bulge at many of Europe’s major shippers.

Could Royal Mail be next?

All of this bodes well for British courier giant Royal Mail (LSE: RMG), whose own European operations continue to deliver the goods. Its General Logistics Systems division provides ground-based services in more than 37 countries, and operates out of more than 650 depots spanning key European markets including Germany, France and Italy.

Royal Mail saw both revenues and volumes from this arm advance 8% in the nine months to December. And while its UK operations saw volumes edge a more modest 3% higher during the period — a performance that caused revenues to flatline — the London firm noted that activity had picked up substantially in recent months.

And like TNT Express, Royal Mail has undergone significant restructuring in recent times, measures which the business expects to provide cost savings of around £70m per year from next year. As well as promising to underpin strong earnings growth in coming years, I believe that this transformation package could also make Royal Mail itself an attractive target for potential suitors.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.