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One of the least debated angles of DSV’s M&A chase has been why executives in Copenhagen have opted to offer Panalpina (PAN) shareholders about 20 years of core adjusted cash flows, pre-synergies, to sell out, after bidding low for Ceva Logistics.

Another is whether a different rationale should apply to either scenario.

So, let’s look at how a DSV + PAN versus DSV + Ceva would look and what kind of operating business lines risk the Danes want to dilute as a result of their deal-making.

Rumble in the jungle

When DSV was swiftly rejected by Ceva in early October – walking away, without fighting, from a deal that would have significantly rejigged its assets portfolio in contract logistics (CL) – CL heft was in check, alongside scale in freight forwarding (FF).

(CL is the supply chain’s wire between container/air shipping and asset-light transport services, but typically dilutes T&L margins)

At that time, nobody questioned the strategic logic of such an approach, but investors, of course, did not react favourably, knowing the involvement of white knight CMA CGM – which now controls Ceva via a 50.6% stake, having upped its holding from 25% at IPO (see below) in May – which made a DSV bid virtually impossible, or just very expensive.

(Click to expand)

(Courtesy of one of the players involved in the Ceva IPO)

(Courtesy of one of the players involved in the Ceva IPO)

DSV has been a spectator with regard to Ceva so far, yet its 2020 targets disclosed last week proved it needs to do more inorganically to prop up its market value.

(Click to expand)

(Source DSV)

(Source DSV)

In fact, some sources have suggested DSV is “desperate to do anything” to reach bigger scale in 3PL services.

However, what it is trying to achieve is very similar either with Ceva or Panalpina.

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(Source Hedging Beta, which is owned by the author of this analysis)

(Source Hedging Beta, which is owned by the author of this analysis)

A new DSV 

Before it acquired UTi Worldwide in late 2015, not many in the FF arena gave DSV much credit, while company insiders and outsiders have often acknowledged the perils of relying on organic growth in FF, which for DSV has been harder to achieve ever since the UTi integration completed, although the de-stocking cycle is also partly to blame.

DSV last week reported 2018 air and sea revenues of Dkr36bn, with unit ebitda of Dkr3.7bn before special items (it doesn’t break down the performance of air and ocean); road turned over Dkr31.2bn, with Ebitda at Dkr1.27bn; while solutions (contract logistics) sales came in at Dkr13.2bn, with ebitda at Dkr939m.

(Click to expand)

(Source Hedging Beta, which is owned by the author of this analysis)

(Source Hedging Beta)

With Ceva, which is still a rumoured target for DSV despite CMA CGM’s ownership, the enlarged pro-forma sales of the Danish company would change as shown in the table below.

(Click to expand)

(Source Hedging Beta, which is owned by the author of this analysis)

(Source Hedging Beta)

Combined air and ocean revenue and ebitda are only slightly different as a percentage of total group revenues and adjusted operating cash flows; CL becomes significantly heavier, on both counts; while road sales and adjusted cash flows are diluted.

Under this scenario, DSV would compete more closely with major contract logistics payers, as implied in the table below.

(Click to expand)

(Source Ti.com)

(Source Ti.com)

PAN allure 

Panalpina reports its numbers at the end of this month, but it is likely, given fourth quarter trends, that ocean and air will be responsible for the amount of annual revenues and ebitda highlighted in the first HB table – as such, a combined DSV + PAN entity will be much stronger in air and ocean FF than CL activities.

(Click to expand)

(Source Hedging Beta, which is owned by the author of this analysis)

(Source Hedging Beta)

However, under both scenarios, DSV manages to dilute heavily its road exposure, which was its 2018 soft spot…

(Click to expand)

(Source DSV)

(Source DSV)

… and which, for many reasons, is more problematic and structurally less profitable than other 3PL activities. This, in turn, might also mean that currently DSV does not want to fight with other heavyweights in the road marketplace.

(Click to expand)

(Source Ti.com)

(Source Ti.com)

Last Friday, I looked at the merits of a CH Robinson (CHRW) + PAN tie-up in air and ocean, and previously PAN + Agility was on my radar.

Both CHRW and Agility, or just some of their operating units, could fit DSV and not just PAN. So, the Ernst Göhner Foundation, which owns a ~ 46% stake in the Swiss 3PL, ought to be careful with its tinkering because DSV management is right in suggesting that there is life after PAN, if PAN doesn’t go through.

Then, what about XPO Logistics, for instance, if added CL and road exposure are the only available alternatives in M&A?

(The free float of XPO is nearly 100% against PAN and Ceva at 54% and 49%, respectively)

Whatever the target, what is undeniable is that DSV must be quick to strike a deal aimed at shoring up its trading multiples – on which it severely weighs downside risk stemming from a late business cycle that could be unforgiving for its shareholders.

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