Deutsche Post likely loser under new German government

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FRANKFURT (Reuters) - Deutsche Post DHL shot itself in the foot by defending its near-monopoly in the German mail market, and the looming end of its tax advantage will open the door wide to rivals like TNT.

Deutsche Post is the only postal service provider in Germany that is exempt from paying value-added tax, which German media have said gives the company a cost advantage of up to 500 million euros ($728.5 million) over rivals.

Now one of the parties that will be part of a new government is making noises about ending the tax exemption sooner than expected to create a level playing field in the German mail market, opening the door for rivals to snap up market share and potentially forcing deep cost cuts at Post.

TNT, a Dutch group, stands to benefit the most from a more competitive environment in Germany as it already has some business in Germany that it could build on.

Deutsche Post has a market share of close to 90 percent in Germany's 6.5 billion euro per year letter mail market. To protect that, it has backed a minimum wage and the tax exemption to drive up cost barriers to competitors' market entry.

Analysts said they estimated an end to the tax exemption would lower Deutsche Post's annual earnings before interest and tax (EBIT) by between 150 million euros and 250 million euros. The company had a 2008 EBIT of 2.25 billion euros.

VERY HEAVY NEGATIVE IMPACT

ING analyst Axel Funhoff said it seemed "obvious" that the VAT exemption and a minimum wage for postal workers, both issues which could have a "very heavy negative impact," would soon be back on the political agenda under a new government.

Heeding warnings by the European Union, the German government had agreed to end the VAT exemption next year. But now the FDP, the designated coalition partner in a new center-right government, wants to speed up the process.

Gudrun Kopp, an FDP member of German parliament, told German paper Welt Online this week the party will seek to cut Deutsche Post's tax advantage as soon as possible.

The FDP, a strong proponent of free markets, has vowed to cut government spending in around 400 areas and reduce taxes by 35 billion euros, which critics say is unaffordable.

"The FDP activity is very good news for TNT," said Petercam analyst Thijs Berkelder.

TNT is already active in the German letter mail market but has struggled to grow or make money there. According to Sal. Oppenheim, TNT Post in Germany posted an operating loss of 50-60 million euros last year.

"TNT Germany could quickly turnaround from now being a slow growing loss generator again into a rapidly growing mail challenger with profit potential," Petercam's Berkelder said.

Deutsche Post's stock has edged up 1.7 percent so far this year, while TNT's shares have advanced 33.8 percent. Investors hope that continuing market liberalization will create growth opportunities for TNT in Germany and other European countries.

RISING WAGE COSTS

Since its privatization in 1995 and the liberalization of Germany's letter mail market in 2008, Deutsche Post has fought to maintain its dominance over rivals.

It supported the minimum wage for postal workers to coincide with market liberalization. The minimum was set above what its competitors were paying and able to pay workers, and parts of smaller rival PIN Group were forced into insolvency as a result.

But now the company is burdened by high wage costs and is locked into a wage agreement that prevents it from cutting jobs before mid-2011.

It is in talks with union Verdi to make employees work longer hours with no extra pay and defer a planned wage hike by a year. Otherwise, it has said it could outsource some services or scrap mail delivery on Saturdays to reduce its costs.

"At least theoretically, Deutsche Post could outsource part of the close to 100,000 employees in the pick-up and delivery network, which basically means the mailmen of the company," Sal. Oppenheim analysts said in a note.

Profits at Deutsche Post's Mail division, which generates more than half of its operating profit, could "melt like snow in the sunshine" without immediate efforts to cut costs, the division's head told Reuters last month.

"Deutsche Post has a problem in German mail as declining volumes are accompanied by rising wage costs and stable prices set by the regulator," said Equinet analyst Jochen Rothenbacher.

Under Germany's new government, Deutsche Post may face an environment that is less favorable for upholding its monopoly. It will have to find a way to offset new VAT costs on top of its already-high cost base just as new forms of communication make it harder to make money with old-fashioned letters.