Analysis - declining cash levels could lead Maersk on a $5bn new equity quest
I have been thinking a lot about the cash and liquidity profile of Denmark’s AP ...
Now that a trade sale of CEVA Logistics to oft-rumoured suitor France’s Geodis is unlikely to materialise any time soon, speculation has grown that the private equity-owned 3PL is flirting with using the equity capital markets to fund an ambitious growth plan.
Given favourable IPO trends in the first half of this year, spurred by low volatility, CEVA could be right to tap new investors and pursue a float as early as next year.
One banking source in New York said last week “it is way too easy to speculate on any possible outcome now that CEVA has opted to go solo”, but several other contacts argue the stock market could be ready to welcome a long-awaited IPO.
“If new equity capital is put to work for a sizeable acquisition, market appetite could be there,” a European Capital Markets banker in London said. “I’d make sure my allocation is not scaled back.”
So could there be an incredible twist in this fascinating corporate story? Could proceeds from an IPO be used to undertake a large, possibly transformational, deal rather than de-lever the balance sheet?
For the record, despite operational improvements, CEVA is still burdened with a meaningful amount of debt and clearly remains under-capitalised, although a sound debt maturity gives it room for manouevre if it aims to exploit the public markets in the next 18 months or so.
The idea that CEVA could raise, say, up to $2bn of new equity in a public offering in order to grow inorganically is not actually that far-fetched, but hinges on the key assumption that the deal is properly priced, and that existing owners, led by Apollo, will be willing to dilute their holdings significantly.
There is one caveat: there remains a paucity of targets that could allow CEVA to leapfrog its closest air freight rivals – DB Schenker, Kuehne + Nagel, Panalpina and Expeditors – and, dare I say this, to even challenge DP-DHL for first place in the global rankings.
While M&A, financed by a cash call, would make a lot of sense at a time when the shares of the world’s largest freight forwarders and transport brokers continue to show signs of strength (despite quarterly financial figures that have brought more pain than joy to most, barring DSV), there are two obvious problems if CEVA decides to turn acquisitive.
First, it doesn’t need to grow just for the sake of growing, but needs more efficiency and profitable growth.
Second, exchange rates work in favour of a takeover rather than an acquisition-led strategy, and this may be the case for some time, given the speed of Fed funds hikes in the US.
On the block
There are several moving parts, but the rationale is simple. If an IPO aimed at funding M&A turns out to be the way forward, and only a small part of the proceeds used to pay down existing debt, the new company could likely refinance its debt obligations at more convenient rates and roll them over on longer duration, particularly if it strikes a deal with a target running low on debt.
I am still convinced that its contract logistics unit remains more attractive than freight forwarding operations, but I hear it is more likely that CEVA would use IPO proceeds to bulk up inorganically in air freight.
“That was the intention until recently, anyway,” a senior corporate raider based in Switzerland told me last week.
Then, given their rankings, Damco and Hellmann and Dachser inevitably stand out as potential targets in the top 20 in air freight, while I seriously doubt the forwarding operations of China’s Sinotrans, which would be a good fit, would ever be divested.
Based on prevailing trading multiples, my best guess is that Damco’s enterprise value will unlikely be worth much more than $1.5bn if a change of ownership occurs.
Meanwhile, the totality of Osnabrück-headquartered Hellmann – which, as it said recently, “is currently undergoing realignment and reorganisation, adapting the company’s legal organisation to its continuous expansion and changing market requirements” – could be attractive only if it was sold at a discount to fair value, reflecting its current restructuring.
I understand the company is not on the block, but should it be valued between $1.2 and $1.5bn, including net debt, its owners could decide otherwise.
“No, it is not [on the block] but as you know that means nothing,” a veteran freight forwarder pointed out recently.
Yet CEVA doesn’t need all the German company’s operations, which means it could strip some of Hellman’s assets and flip them to other corporate buyers if it reached a deal.
Dachser, of course, is probably out of reach; the Kempten-based company is too big for CEVA, which anyway might only be interested in its sea and air operations.
Which brings us back to square one – although it ought to be added that everybody in logistics appears to want to get into the German market, and assets there will not come cheap.
So, Geodis – which has a far larger market share than all the aforementioned companies, aside from Sinotrans, and which is rumoured to have ended conversations with CEVA only last week, remains the most likely tie-up candidate.
“Now it’s up to CEVA to deliver and prepare the road to a market listing if it cannot actually agree a deal with the French,” a senior freight forwarded in Germany noted last week.
How’s CEVA doing, by the way?
While it is possible that CEVA could be on the path to recovery, not only because managers are working hard to boost productivity, but also because freight rates have risen, weakness in the US dollar will likely help headline sales grow at a steeper pace, although I understand that there could be an offsetting adjustment in the coming quarters, given its diverse cost base outside of the US.
In the first half of the year, operating cash flow and free cash flow trends were encouraging, and working capital management is set to improve based on certain initiatives through to early 2018, which is a pivotal year.
A structurally weaker US dollar makes CEVA cheaper for would-be suitors from Europe, but the most important question here is what kind of exit multiple is CEVA and owner Apollo willing to accept to sell?
If weakness in the US dollar is here to stay and works in favour of an opportunistic takeover of CEVA, by contrast a much stronger dollar would render its deal-making more convenient abroad. Quite frankly, ruling out ocean freight and contract logistics as areas where it will grow inorganically, then a combination with an extremely well-run domestic company such as Expeditors would challenge DHL Global Forwarding at the top of the league tables.
“DHL GF itself could blink if it sniffed takeover chatter involving Expeditors and CEVA,” said one M&A banker in London.
On the face of it, a trade sale remains the most likely option, but the business will only be sold if the exit multiple is right – which has to be “at least double digit,” a source close to CEVA’s thinking recently whispered. The chairman of the board of Panalpina, Peter Ulber, also told me this week that such a trading multiple was fair given its assets mix.
Its take-out valuation is unlikely to be as high as those of the major freight forwarders whose shares are publicly listed (15x-17x forward Ebitda), because CEVA is not as profitable as others, but I suspect management and Apollo will push for more than 12x – and the price tag could rise in the near future if CEVA’s cash flow profile gets closer to break-even.
Consider that, based on its trailing adjusted 2016 Ebitda of $273m, CEVA’s enterprise value (EV) – market cap plus net debt – comes in at $2.7bn, if it was valued at least 10x adjusted, trailing Ebitda, but forward Ebitda could rise closer to $300m, if CEVA sticks to its guidance and 2016 turns out to be ground zero.
Based on this valuation – to all its suitors this is essentially the floor in any sale negotiation – and given the $2.14bn of net debt sitting on its books at the end of the second quarter, its implied equity value today would be around $560m, excluding minorities. But again, it could be higher, if management delivers on its promises in terms of cash flow generation in 2018, and there are obvious tailwinds which make CEVA much more attractive now than it was earlier this year and than it could be in a year’s time, if all the pieces fall into the right place.