A couple of years have passed since the management team at DSV promised it would strike another large deal – now, given market talk spurred by the latest corporate events at AP Møller-Maersk Group (APMM), DSV’s most likely target might be APMM’s freight forwarding arm, Damco FF.

Network (source DSV)

Network (source DSV)

Deal or no deal?

Sources with knowledge of internal affairs have told me that as Damco restructures and reorganises its logistics and freight forwarding businesses, calls from head office have reached some employees, while other senior staff remain in limbo.

“This is the ideal environment for a quick deal to be agreed between APMM and a trade buyer, possibly before 1 January,” one deal-maker in London said recently, and many agree DSV could be ready to pull the trigger.

If so, DSV had better be quick, given that “so many of Damco FF’s clients have been left wondering what its parent’s latest move might mean for their relationships, let alone for future standard services”.

Some could easily decide to choose other carriers and forwarders to do business with, a rival top 20 freight forwarder pointed out.

However, a DSV/Damco FF deal is not truly compelling, in my view, but it is possible that domestic ties could prevail if the parties agreed a convenient deal for both, as it often happens in M&A struck on friendly terms.

DSV is projected double Ebitda in 2020 vs 2015 (source: marketscreener.com)

DSV is projected double ebitda in 2020 vs 2015 (source: marketscreener.com)

What DSV would have to prepare for with the purchase of Damco FF is very similar to what it did with its latest integration, of UTi, given Damco FF’s headcount overhang, sub-par gross profit margins, poor working capital management, credits collection, IT systems that need a revamp, lack of critical mass and a slew of other side issues, including corporate governance.

The main difference with the UTi deal was that, when it was announced, the US-based logistics company dwarfed Damco FF in size, and when DSV bought UTi for about $1bn in late 2015, the acquirer was worth about 7x the value ascribed to the target. This meant the UTi deal was immediately regarded as a transformational takeover.

DSV+UTi (source DSV)

DSV+UTi (source DSV)

Stamping the same UTi revenue multiple at exit on Damco FF (similar to UTi, Damco FF is unlikely cash generative on a standalone basis, excluding logistics activities) would value the target at less than $500m, which today implies a 30x multiple for DSV’s market cap ($15bn) against the possible take-out price of Damco FF.

Even a much larger $1bn deal now would be worth just about 6-7% of DSV’s own market cap, while UTi Worldwide was worth 15% of DSV.

My take?

It is going to be hard to convince investors that this is the acquisition DSV needs to continue its astonishing growth rate, which supports a value-accretive corporate story.

Value accretion fueled by M&A and M&A talk (source Google)

Value accretion fuelled by M&A and M&A talk (source Google)

Value accretion fueled by EPS growth (source DSV)

Value accretion fueled by EPS growth (source DSV)

But if it did happen?

With Damco FF under its belt, and depending on how much of the old revenues booked by other sub-Damco units it could retain, DSV would leapfrog Expeditors in the global ranking by revenue, significantly narrowing the gap on third-placed DB Schenker and market leaders DHL Global Forwarding and Kuehne + Nagel.

UTi was truly transformational for DSV’s global footprint, and with Damco FF it could further expand its global reach, while perhaps even carrying out most of the heavy lifting that APMM must entertain before the 1 January 2019 deadline.

Several banking and trade sources argue that DSV is the optimal solution, given that it could easily push up the price of Damco, ultimately helping APMM de-lever its stretched balance sheet. Perhaps they are right, but more importantly: how is the reorganisation of Damco FF going to work?

One of my senior contacts with direct knowledge of the Damco story says that once staff at its data centres are excluded, the remaining Damco employees, which number around 9,000 and include those in logistics, are currently split “into four regions and 17-20 areas”.

But the new Damco FF will comprise only “three regions”, I’m told, “and this means the regional offices in Dubai will be dissolved, with operations in India going to Asia and Middle East plus Africa going to Europe… my guess is that in Dubai there are now around 40 people”.

Meanwhile, DSV has grown a lot inorganically in Asia and it is in South-east Asia, and I am informed that some customers have not been fully satisfied with the value they have received since UTi Worldwide was consolidated.

“The three different remaining Damco regions have clear air focus in Asia and, with ocean being important in Europe, Asia and the old Dubai region (Mumbai+Dubai), also have a relatively big share of the ocean volumes.”

The chart below shows DSV’s geo mix:

Footprint (source DSV)

This indicates a possibly highly intricate reorganisation process would be needed.

“The problematic situation will be splitting up Damco’s operational business lines, as the current 17-20 areas each have an operational set-up focused on all FF products, plus what is moving to APMM (SCM+VAS). Some operational centres are 100% SCM-dominated, while others are more of a mix.”

This is something DSV could exploit, and there could be more to it in terms of cost-cutting, although DSV has not targeted cost synergies in terms of a lower headcount with UTi, as I erroneously expected when the deal was announced.

“Several area teams, including operational leadership, are under scrutiny now and finally… the Damco head office in the Hague is also quite manpower-heavy and nowhere near competition in terms of efficiency.”

In fact, this is where some of its heaviest costs are.

“DSV, for instance, is much leaner at top level”, and major cost synergies there could be targeted by the acquirer rather than existing management.

DSV recently entertained a small bolt-on deal, but that is hardly the way forward in terms of shareholder value accretion, especially considering how much capital it has deployed in the past two quarters, as well as aggregate numbers expected for this year ($500m), and in the fourth quarter, in particular.

Capital deployment ex M&A (source DSV)

Capital deployment ex M&A (source DSV)


Capital deployment ex M&A (source DSV)

Capital deployment ex M&A (source DSV)

In short, DSV needs to do more, and swiftly.

In mid-August I wrote “A rally by DSV, but is it hype or hope? ”. I highlighted certain risks, and those risks are pretty apparent now – although, admittedly, my predictions so far have been 1% or so off the mark, given that DSV stock briefly hit a record high of Dkr611 before falling about 10% to its current level of Dkr550.


Leave a Reply

  • Puneet Chaturvedi

    October 11, 2018 at 8:51 am

    Dear Mr. Pasetti,

    Thanks for sharing the analysis, good one. I agree with your thoughts that DSV really needs to convince investors that this will be again a growth story (I doubt).
    If it is done then it needs careful intricate re-organisation process. There was no mention of the heavy investment which is done on there IT platform “TWILL”.

    Lovely reading your article. Looking forward for more.

    • a.pasetti@yahoo.co.uk

      October 11, 2018 at 4:12 pm

      Many thanks, great to hear you find our coverage useful! I am looking closely at Twill, and associated investment needs; hope I’ll be able to share some additional insight soon.