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The takeover of Global Logistic Properties (GLP) and the ongoing consolidation in container shipping (for which, read Cosco Shipping Holdings‘ takeover of OOCL and Maersk’s Hamburg Süd buy) were the biggest M&A highlights of 2017 – but it was a year that was broadly disappointing in terms of deal-making in the global transport and logistics sector.
Is 2018 going to be any better? And especially, given recent speculation, what are the chances of major US shippers getting their hands dirty in M&A, targeting deeper control of supply chains stateside and elsewhere?
Probably higher than they were before.
US-driven activity set to dictate trends
The US is traditionally a hotspot in terms of M&A on a larger scale, thanks to easier access to capital and more efficient shareholding bases and capital structures. Interestingly, soon after Christmas, market reports suggested that XPO Logistics could be acquired by Home Depot, one of its key clients.
The bears took this rumour with a pinch of salt, but ironically a Home Depot-XPO deal is exactly what many players in the logistics industry would need to bolster shareholder value, and lately it has helped precisely in that regard.
This comes as another question is concurrently being asked: whether Home Depot – which in 2015 named XPO its best supplier worldwide – is “Amazon-proof”, while XPO stock currently changes hands around all-time highs of over $90 a share, for a 15% premium against its undisturbed share price of about $80 a share.
Notably, there has been no sign of weakness in its stock price since the first rumours emerged, so something might be actually brewing in Greenwich, where XPO’s senior management is based. Market reports have not been officially denied by the parties involved, while XPO has also been talked of as being a possible target not only for Home Depot, but also for Amazon itself.
Similar in size (in terms of sales) only a few years ago, Amazon’s sales are now much higher than Home Depot’s, and with a $570bn market cap, it almost triples its smaller “rival”.
And what about Wal-Mart, whose stock has also gone through the roof in recent weeks?
Wal-Mart’s infrastructure network is far bigger than that of either Amazon or Home Depot, which is obvious from its top-line figure. In fact, Wal-Mart remains Amazon’s only plausible antagonist in the e-commerce retail landscape, so Home Depot could be trying to exploit obvious trends by delivering fast goods in many corners of the US and Europe.
While I still think an XPO-DSV combination is more compelling, it’s tempting to suggest that M&A led by major shippers could provide another fillip to frothy valuations for many transport and logistics players in the US and elsewhere, which would surely gain momentum should a shipper of Home Depot’s size successfully wrap up a takeover of XPO.
In hindsight, a smaller deal that flew under the radar in 2017 could now carry greater significance in the supply chain. In June, carmaker Porsche acquired a 97% stake in Germany’s PVT Group for over €300m.
PVT is a software provider focusing on traffic planning and management, as well as transport logistics. This is the kind of vertical integration that carries little risk, but which has the potential to “optimise flows”.
“The group operates at the interface of key trends we consider to be of particular relevance for the future development of the mobility landscape. We see substantial growth potential in the area of optimising flows of people and goods,” Porsche said at the time.
While shippers might look to exploit the obvious benefits of closer control of supply chain affairs (better prices on rising volumes that might be here to stay), the role of transport intermediaries and freight forwarders, in particular, remains questionable under traditional freight forwarding models, and it would be risky to underestimate the paradigm shift occurring in the industry, with shippers sitting comfortably in the sweetest negotiating spot.
In many ways they are stronger than the carriers, which could be set to last – until, that is, rising oil prices spoil the party by forcing consumers to tighten their belts.
If consolidation within the supply chain materialises between some asset-light transport groups and their clients, then one obvious target is a US 3PL you not have heard of: Landstar System. This is a gem, labelled by a couple of my banking sources as “highly attractive” and “dynamic”, as well as “surely appealing for a buyer”.
Its stock is a bit expensive, based on core trading multiples, but the company ticks the right boxes financially – it’s healthy and recently upped its buyback programme while agreeing to pay a special dividend to shareholders.
Its main P&L figures show how good 2017 was in terms of performance.
The vast majority of its sales stems from truck transportation activities: van equipment and unsided platform equipment make up over 90%, with the remainder being less-than-truckload, rail intermodal and ocean and air cargo.
The downside for a buyer – financial sponsors could easily lever up its balance sheet – is that it might cost up to $6bn. But it is equally as likely, in my opinion, that the company itself could use its financial wherewithal to act as a market consolidator.
Elsewhere, a healthy number of smaller deals in the region of $1bn-$3bn “could be on the cards”, a deal-maker in New York recently told me. Yes, Ceva Logistics is of course the obvious name at the top end of that range, but another name currently under the radar could attract interest – I heard that HUB Group has also been named as a potential takeover target.
But the list grows exponentially in the US.
Of course, Expeditors and CH Robinson remain high on my M&A radar, although their size (with market caps of $11.5bn and $12.5bn respectively and both trading at all-time highs) and the recent rally on the stock exchange won’t propel urgency of action for any suitor, but hey – if XPO is a target, these two will inevitably also be considered possible prey.
Much depends on whether Amazon, Home Depot and Wal-Mart ever blink. For them, size and additional revenues (better if profitable) are of paramount importance in a game where added velocity to reach clients efficiently remains a delicate balancing act for most.
Deal-making wasn’t spectacular last year in the US, and a few observers expect 2018 to be a year to remember. Perception and predictions could change in a flash, however, if XPO is taken over.