Deutsche Post to Buy UK's Exel

The purchase, which would be the biggest-ever acquisition in the history of Deutsche Post and still must be approved by Exel shareholders, is part of the German group's strategy to reduce its dependence on mail delivery before it loses its domestic monopoly in that business area at the end of 2007.

Under the terms of the offer, which has the express support of Exel management, Deutsche Post will pay a mixture of cash and shares for the British logistics firm.

Deutsche Post said it would pay Exel shareholders 13.30 euros plus a 0.25427 Deutsche Post share for every Exel share held. That would translate into an exchange ratio of approximately one Deutsche Post share for every four Exel shares held.

Exel, the world's largest logistics provider, employs more than 110,000 people and has operations in 135 countries. The company provides transportation and logistics services for large companies, including delivery of food to grocery stores, medicines to hospitals and auto parts to car makers. Its clients include DaimlerChrysler, Volkswagen and Marks & Spencer.

Based on the closing price of the share of Deutsche Post on Friday, the total offer price for Exel stood at 18.39 euros per share, the German company calculated. Deutsche Post would put up 72 percent of the purchase price in cash and finance the rest via the issue of new shares, it said.

The German firm is flush with cash following the flotation of its banking unit Postbank last year, which raised 2.6 billion euros ($3.16 billion) in cash and boosted Deutsche Post's war-chest to close to four billion euros. On top of that, a further 1.5 billion euros would be raised from the issue of new shares.

Road to the top

For Deutsche Post, a takeover of Exel had a "compelling strategic and financial logic," the German company said. Exel had a strong position in both Britain and the United States, which would complement Deutsche Post's activities in Europe.

"This transaction is a major strategic step in Deutsche Post's development and represents the continuation of our strategy to become the leading global logistics company," said Deutsche Post chief executive Klaus Zumwinkel.

Exel also welcomed the deal, with chairman Nigel Rich describing the offer as "an excellent opportunity for our shareholders to realize significant value in cash and, if they wish, to retain an investment in the enlarged group."

Deutsche Post estimated the deal would generate annual cost savings of around 220 million euros before tax by 2008. And it would begin to enhance earnings from the second year.

Deutsche Post said that Exel chief executive John Allan would be appointed head of the enlarged logistics business.

Analysts suggest that the offer by Deutsche Post could spark rival offers for Exel from companies such as United Parcel Service (UPS) and Fedex in the United States.

End of monopoly

Deutsche Post needs to strengthen its logistics activities ahead of the loss of its monopoly in standard letter delivery at the end of 2007.

Already, the monopoly is gradually being worn away as private rivals are slowly allowed in to certain areas of the mail delivery business. But the full liberalization of the letter delivery market in 2008 will mean that Deutsche Post has to strengthen other areas of revenue.

In 2004, mail delivery accounted for two billion euros of total group operating profit of 3.3 billion euros, while logistics turned in profits of just 280 million euros.

Deutsche Post has therefore acquired companies or minority shareholdings in companies in Britain, the Netherlands and Spain. At the same, it has diversified its logistics and express delivery activities, buying such heavyweight companies such as DHL and Airborne in the US.

But such a voracious appetite could pose Deutsche Post with substantial challenges in the near term as it tries to integrate its string of recent acquisitions, analysts said. Merck Finck analyst Robert Heberger suggested that the price Deutsche Post is paying for Exel is "too high."

Investors appeared to agree. In early afternoon trading on the Frankfurt stock exchange, Deutsche Post shares were showing a loss of 0.50 euros or 2.50 percent at 19.48 euros in a generally weaker market.