Friday evening TNT Express announced that it has received an unsolicited non-binding and conditional proposal from UPS for the acquisition of the whole of the issued capital of TNT Express at an indicative price of € 9.0/sh. This is 42% above Friday’s closing price. TNT Express’ Supervisory and Executive Boards have rejected the proposal and have informed UPS accordingly but continue to be in discussions. We would like to point to our Flash on TNT Express published today for further details on the deal.
BBB+ requirements achieved
Adding the stake of TNT Express at € 1,415m (from € 990m) to the net debt position of € 1,053m end 3Q11, PostNL’s long term credit rating aim of BBB+ / Baa1 would no longer be endangered. Management noted that the net debt requirement for such a rating was € 300-500m.
Distributable equity moving in the black again
At a bid price of € 9.0/sh, PostNL’s 2013 distributable equity moves inthe black again, taking into account a € 1.0bn IAS 19 write-down but stock dividend till 2014. Given the improvement in bond yields, we believe the write-down will be even less and hence distributable equity should no longer pose a threat to a cash dividend. Furthermore a change in accounting principles in the corporate financial statements of PostNL NV from Dutch GAAP to EU-IFRS should result in an additional positive equity impact. Management indeed notes that even upon the adaption of IAS19 in 2013 (around € 1bn negative impact) it expects equity in the corporate financial statements to remain positive
Dividend again in cash?
PostNL recently stepped down from paying a dividend in cash due to negative consolidated equity AND the uncertainty of a BBB+ / Baa1 rating. Management sticked to its dividend policy of paying out 75% of underlying net cash income with minimum of € 150m p.a, but announced to distribute its dividend in shares. We believe both hurdles have now been taken and PostNL management could again decide to move to a cash dividend.
Pension situation improving
PostNL will enter into a dialogue with the pension funds and the Working Council and the Unions to discuss changes to the pension arrangements since the current arrangements put too much financial pressure on the company. Dutch bond rates and equity markets are also improving favourably, which should improve the coverage ratio.
We included TNT Express at our new TP of € 9.7/sh and lift our TP on PostNL from € 4.4/sh to € 5.8/sh. We move to Accumulate from Hold. Since a cash dividend would again be possible, we cross checked our valuation with an implied 8.0% gross dividend yield and added the delta between excess cash received and a maximum net debt level of € 500m (assuming cash dividend start again in 2012). This would point to a fair value of € 4.7/sh.