FedEx (NYSE: FDX) looks to step up the competition with rival UPS as it recently asked the EU (European Union) competition authority to allow it to buy TNT, a European competitor.
This is an interesting move because a few years ago, TNT agreed to an offer by UPS but the European competition authority didn’t agree with the project and it was rejected. Why would be this time different and why is FedEx interested in such a move?
If the proposal is approved, then the combined air fleet of the two companies would better compete worldwide with UPS. Moreover, one of TNTs most valuable assets is represented by its European road network and this was the main reason UPS made an offer a couple of years ago as well.
The timing though cannot be worse for the FDX stock price as a combination of fundamental factors weigh on it.
Firstly, the Chinese stock market is in a freefall and last week saw huge swings. This ended over the weekend with the Chinese central bank cutting rates by a quarter of a percentage point. This move comes in desperate times as it is well known that lower interest rates benefit equities.
The point about this cut is that it is related to the fact that what is happening in China affects the whole world. If the Chinese economy is shrinking, the whole world would suffer. As an example, around thirty percent of Australian exports are going to China, and therefore a slowdown there implies fewer imports out of Australia.
For a global player like FedEx, any news out of China is of vital importance.
Back in the United States things are not that simple either. The Federal Reserve of the United States is preparing to raise rates, at least this is what was suggested at the last meeting, and up to two rate hikes are possible this year.
This is a twisted situation as it shows two major central banks are moving in opposite directions.
Secondly, whenever there is a merger and acquisition deal, the stock price of the company buying will suffer, especially after the terms of the deal are announced (cash only deal, cash and stocks, shared management, etc….)
From a technical point of view, there is a possible head and shoulders forming with the head being almost completed and this is a bearish sign as well.
Based on all of the above, I am favoring a put option on the FDX stock price, but this will depend heavily on the answer of the European competition authority. On a favorable outcome, end of month expiration date should do the trick for the put option.
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