Deutsche Post to pay for Exel mainly in cash

The German postal giant is sensitive to suggestions that its pursuit of Exel has echoes of Deutsche Börse's ill-fated bid for the London Stock Exchange - an adventure that resulted in the removal of both its chairman and chief executive.

Klaus Zumwinkel, Deutsche Post's chief executive, has told investors that the offer, which values Exel at just north of £12 a share, will be 70 per cent-financed by cash to avoid diluting existing shareholders significantly. Deutsche Post also promised investors savings of up to €200m (£136m).

Major shareholders in the German postal giant said they would back a bid provided the price was kept at about £12 and Deutsche Post limited the amount of new shares it issues to fund it.

Since 1996, Deutsche Post has acquired 55 businesses, splashing out nearly €6bn in the past four years on a series of takeovers, the biggest of which was the €2.4bn purchase of DHL, the UK parcels business, in 2002.

A formal offer for Exel is thought to be a fortnight away, and there is the possibility of an auction breaking out for the business if rival logistics and postal operators such as UPS join the fray, pushing the price well above £12. But advisers to Deutsche Post believe this to be a remote possibility, given the premium it is offering to pay to gain the backing of the Exel board.

Exel shares climbed 10p yesterday to close at 1,185p. At the start of the year they traded at 725p.

Despite the takeover spree, Deutsche Post has embarked on over the past decade, it has net cash of some €5bn which investors are keen to see used on acquisitions. It also faces pressure to expand abroad because of declining postal volumes and profit margins in its home market, and the looming deregulation of the German postal system, which will result in Deutsche Post losing its domestic monopoly in 2007.

In readiness for this, Deutsche Post has sought to reduce costs in the past four years by cutting its workforce by nearly 10 per cent and trimming its branch network by 3,000 outlets.

But growth is likely to come predominantly from outside the company's home territory and its traditional mail business. In contrast to the German postal market, where volumes have declined by 2 per cent a year, the UK mail market is growing, even though the profit margins here are a fraction of those achieved in Germany.

Logistics - a fancy name for transporting things - accounts for less than 15 per cent of Deutsche Post's €45bn turnover. However, a takeover of Exel, which has sales of £5bn and boasts clients such as DaimlerChrysler, would transform all that. By combining Exel with Deutsche Post's existing UK parcels business, DHL, it would also create a much more potent competitor to Royal Mail when full postal liberalisation takes place in the UK from next year.