Analysis: Hapag-Lloyd, CMA CGM, K+N and 'a remarkable businessman'
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M&A-related news has appeared with a vengeance lately in the transport and logistics industry, and odds are short there could be more deals for me to analyse in the second quarter – although I acknowledge that the outlook for multi-billion deals in the supply chain remains challenging at best. Sadly.
It is not just the bankers’ bread-and-butter deal-making, typically in the sub-$500m region, that is doing the rounds, because DFDS recently hogged the limelight in a sector where an outlier and a player often under the radar reminded us on 12 April that there are merits in acting now, using proper financial tools rather than merely financial chicaneries to deliver shareholder value.
The first time I covered the Danish ro-ro shipping and logistics group for Transport Intelligence in early July 2016 – in a story headed DFDS shrugs off Brexit risk – I highlighted how heavy investment was set to boost its growth prospects. And it did, luckily for my predictions, but that alone was not the only lever it pulled.
Its share price appreciated by 57% in less than two years, from Dkr243 to trading at Dkr385 last week, (although volatility in the past few days of trade has impacted share prices). The purchase of the Turkish company UN Ro-Ro alone has contributed to a 10% capital appreciation, most of which came in the first day of trade after the announcement.
Incidentally, just like compatriot DSV – there is a long history behind these two, as the table below shows – it has not been shy in giving investors what they wanted in recent years, both in terms of capital allocation and strategic corporate decisions.
These two aspects, planning and execution, are often hard to muster together in M&A and, in this respect, Denmark’s logistics industry has its loser so far: Maersk, of course, which is bending under a huge amount of pressure to deliver as some large investors are growing impatient, while the press isn’t kind with management.
“Maersk’s big oil exit comes with a $1.2bn ball-and-chain” ran the Bloomberg headline last month.
Private equity and brokers
DFDS agreed to acquire a freight shipping operator, based in a strategic hub, for almost €1bn, in a deal that ticks all boxes financially. The acquisition is expected to be earnings-accretive from year one – and it could not be otherwise, given the financing structure – while return on invested capital is expected to cover the cost of capital.
DFDS is exploiting still favourable market conditions in the debt market to fund the deal, facilitating the exit of its private equity owners. Notably, dividends were scrapped and buybacks stopped in order to pursue growth.
I touched upon possible private equity involvement in the freight forwarding industry recently, when I discussed the possible buyout of Expeditors (to determine how likely such a deal is according to our readers, please check out the comment section of the story), and while I acknowledge cov-lite debt financings have been on the up, the mix of investors who supported leveraged buyouts in the primary market has changed significantly in the past decade, and the depth of the secondary debt markets is another problem.
The Turkish company was sold to DFDS by private equity, and private equity appetite is likely to be the variable that really moves the needle, as I argued at the turn of the year, if we are ever to witness a transformational deal in the transport and logistics industry.
DFDS aside, other news, reports and activity has also caught my attention.
Goldman Sachs recently singled out CH Robinson and XPO Logistics (an oft-rumoured takeover target) as being likely prey as soon as this year, given the price levels implied in the derivatives markets.
“The options market is currently pricing-in some degree of M&A potential for 50% of stocks in the industrial sector and 39% of stocks in healthcare that Goldman analysts view as having a 15% or higher potential for M&A in the next year,” MarketWatch reported last month.
CH Robinson and XPO Logistics are “categorised” as industrials by Goldman – which, incidentally, is not one of the banks book-running the IPO of CEVA Logistics, despite being one of its core relationship advisors in the past. Meanwhile, given latest trends for the freight mix, where perishables and pharma stand out, as well as volumes, the healthcare industry has great relevance in supply chain matters, particularly as far as supply chain logistics and investment is concerned, and not only for the shippers.
Elsewhere, Memphis-based behemoth FedEx recently announced a bolt-on deal that confirmed its ambition to fortify its diverse assets base in Britain, where I expect more deal-making both from FedEx, UPS and DP-DHL, while conservatively allocating capital before its next large deal there is struck.
However, since I wrote in October that Fedex might have wanted to put its stamp on a vulnerable Royal Mail, the stock of the latter has appreciated by almost 50% in six months, rendering a change of ownership less convenient, hence less likely.
FedEx announced on 27 March that it had acquired UK-based P2P Mailing Ltd, a provider of e-commerce transport solutions. The price tag was £92m, but it noted that “P2P’s capabilities complement and expand the FedEx portfolio of offerings important to the rapidly growing global e-commerce marketplace”, adding that the target “provides customers with unique last-mile delivery options, leveraging its relationships with private, postal, retail and clearance providers in over 200 countries. Its industry-leading technology and processes provide plug-and-play options with carrier networks and customer systems”.
While the outlook is mixed, according to JP Morgan, there are many reports pointing to favourable conditions for more consolidation in different segments of the supply chain, but “segmentation is not the answer and cultural barriers remain insanely high”, one London-based deal-maker told me last week.
On cue, Ryder System secured another bolt-on deal this month, spending about $120m to buy MXD Group, which is an e-commerce logistics operator. Regardless of M&A, some analysts remain bearish on its prospects.
Elsewhere, the latest news surrounding Cosco – “The $6.3bn COSCO takeover of OOIL and its container line arm, OOCL, could be stymied at the eleventh hour”, my Loadstar colleague Mike Wackett wrote last week – is hardly surprising. I always expected it to encounter some resistance, one way or another. What’s next then?
Two other names under the radar could shock investors: German terminal operator HHLA, which might be looking at acquisitions as domestic volumes weaken, and as I said two years ago, HHLA was “at critical juncture in its business life cycle“, and, obviously, Wisetech.
In a stroke of luck, good timing, or both, the stock of the latter is up almost 20% last week since I covered it earlier this month, and I am hearing the next bolt-on deal could be announced as soon as the end of the second quarter.