Deutsche Post Faces `Bloodbath' as Mail Monopoly Ends

Deutsche Post Faces `Bloodbath' as Mail Monopoly Ends

http://www.bloomberg.com/apps/news?pid=20601109&sid=aBwsZYcYky74&refer=home

By Jann Bettinga


The headquarters of Deutsche Post in Bonn. Aug. 9 (Bloomberg) -- Deutsche Post AG may be defenseless against invaders into its lucrative home turf as the rest of Europe backtracks on promises to throw open national mail markets.

A two-year delay in opening most of the region is thwarting plans by Europe's biggest postal service to expand. That leaves Deutsche Post little room to improve margins when its letter- delivery monopoly in Germany, its most profitable business, ends Jan. 1. The shares have dropped 20 percent since April, after more than doubling in four years as Deutsche Post shed workers and boosted profit.

``This can turn into a bloodbath. It can drag on for years,'' said Michael Gierse, who helps manage 160 billion euros ($221 billion) at Union Investment GmbH in Frankfurt. The fund recently reduced its stake in Deutsche Post.

Deutsche Post has forecast domestic competition will trim earnings at its mail division -- which makes up over half the company's income before interest and taxes -- by as much as 20 percent by 2009.

The delay in ending monopolies in countries including France, Spain and Italy will ``put a halt to Deutsche Post's foreign expansion,'' said analyst Michael Benedikt at Commerzbank AG in Frankfurt, who has a ``hold'' rating on the shares. ``They won't be able to compensate for market-share losses at home.''

Shares of Deutsche Post in Frankfurt fell 47 cents, or 2.2 percent, to 20.53 euros, the lowest price since Sept. 19. The stock is down 10 percent this year, valuing the company at 24.7 billion euros.

European Delay

The European Parliament dealt a blow to Deutsche Post's expansion strategy on July 11 by voting to allow mail monopolies throughout the European Union to continue until at least January 2011. Deutsche Post had urged the parliament to stick with an original plan to open markets no later than 2009.

EU governments are expected to back the decision, Markus Ferber, a German member of the European Parliament, said July 11. Even so, Germany is pushing ahead with its own liberalization. Economy Minister Michael Glos said in June he saw no reason to change the timetable.

``We have a liberalization mess on our hands,'' Deutsche Post's Chief Executive Officer Klaus Zumwinkel said on Aug 3. ``Everybody can come to Germany, but Germans can't go abroad.''

Preparing for Competition

Deutsche Post has been preparing to compete at home and abroad since the German state began selling stakes in the company in 2000. The state still holds 30.6 percent of Deutsche Post through development bank KfW Group.

To cut costs, Deutsche Post closed about 4,000 post offices in the past 10 years and shed 140,000 jobs, mostly in the domestic mail and parcel businesses. The mail division employed almost 130,000 at the end of 2006.

Deutsche Post also made about $20 billion in acquisitions in businesses such as logistics, express delivery and freight as e- mail began supplanting letters and competition to ship heavier items in Germany increased.

Takeovers of Plantation, Florida-based DHL Worldwide Express in 2002 and Seattle-based Airborne Express Inc. in 2003 positioned Deutsche Post as a global express delivery company pitted against United Parcel Service Inc. and FedEx Corp. The 2005 purchase of Bracknell, England-based Exel Plc made Deutsche Post the world's largest manager of warehouses and inventories.

The buyouts eased investor concerns about dependence on the German mail market.

Deutsche Post boosted sales to 60.5 billion euros in 2006 from 22.4 billion in 1999, and annual profit in 2005 was more than triple 2002 earnings. For this year's second quarter, net income rose 13 percent to 285 million euros as the express unit delivered more packages in Asia.

Debt Increase

The expansion also more than doubled Deutsche Post's net debt, or debt minus cash and cash equivalents, to 3.08 billion euros in 2006 from 1.36 billion euros in 1999.

On June 22, Standard & Poor's downgraded Deutsche Post's credit rating, citing high debt, rising competition and concerns about a slow recovery at the U.S. express unit, which posted losses in at least the past three years. S&P lowered Deutsche Post to A-, the seventh-highest investment grade, from A.

Even as Deutsche Post has branched out, its monopoly in Germany on delivering letters weighing less than 50 grams (1.8 ounces) remains its most profitable business. The mail division had a profit margin of 15.5 percent last year, compared with 1.9 percent at its express unit and 3.4 percent for logistics.

Market Share

Deutsche Post had about 91 percent of Germany's 9.8 billion euro mail-delivery market last year, according to the German regulator, the Federal Network Agency. That will probably drop to 70 percent within five years after liberalization, Commerzbank's Benedikt said.

``They will of course lose market share,'' said Herman Klein, who helps manage 262 million euros at ING Investment Management in The Hague, Netherlands.

TNT NV, one of Deutsche Post's biggest competitors in Germany, has a local market share of about 2 percent to 3 percent, Klein said. The Hoofddorp, Netherlands-based company aims to increase that figure to 10 percent by 2013.

Pin Group AG, a Luxembourg-based deliverer, aims to boost mail revenue in Germany to between 1.5 billion euros and 2 billion euros by 2015 from 168 million euros in 2006.

Not everyone shares the pessimistic view of Deutsche Post's future. Of 33 analysts covering the company, 22 recommend buying the stock, while 11 rate it ``hold,'' according to data compiled by Bloomberg.

Two Main Challengers

Even as the German market is opened, competition will be limited, with TNT and Pin likely the only major challengers, said Andre Mulder, an analyst at Kepler Equities in Amsterdam with a ``buy'' rating on the stock.

The government may also impose a minimum-wage requirement on postal companies, preventing rivals from paying much lower wages than Deutsche Post.

Liberalization next year ``will keep making headlines and weigh on the share price,'' said Jochen Rothenbacher, an analyst at Equinet AG in Frankfurt who rates the stock as ``hold.''

A potential legal dispute between Germany and the European Commission is also brewing as the two argue about German plans to continue exempting Deutsche Post mail services from the value- added tax, Benedikt said.

``The markets don't like uncertainty,'' said Union Investment's Gierse. ``That's why the shares can't perform.''