Market Insight: CEVA convinced it is on the right course, but DSV may call back
A call with a London-based financial broker closely monitoring the DSV/CEVA situation strengthened my conviction ...
The much-vaunted initial public offering (IPO) of CEVA Logistics is expected to take place in the second quarter, the company announced on Monday, in a PR that looked to be gauging market appetite.
What are the benefits and the risks, though?
Second time lucky?
The much-awaited deal is clearly aimed at rebalancing the capital structure of a freight forwarder and contract logistics firm whose consolidated debt burden has weighed on performance, since the Apollo-led buyout 12 years ago.
To start with, the IPO would address a negative equity position and more than $2bn in net debt, which have historically been problematic to manage and have often unsettled investors trading the company’s ballooning debts in the secondary market, whose backing has been pivotal under the ownership of Apollo.
The IPO is arguably a step in the right direction. After years of painful restructurings, it could warrant the 3PL more financial flexibility in a market where trade buyers have not been willing to pay up to take it over, and where fragmentation leaves plenty of room for value creation via M&A. In a statement released today, chief executive Xavier Urbain said CEVA “will be able to accelerate organic growth and participate in market consolidation” following an IPO.
CEVA initially planned to tap the public markets in 2012 when it was ready to launch a $400m public offering on the New York Stock Exchange, yet market volatility spoiled its plan. Rumours of a float have swirled ever since, but now the company intends to seek an “all primary offering” on the SIX Swiss Exchange (where plenty of action is taking place) while looking to raise a much higher amount at launch than previously, at Sfr1.3bn ($1.35bn).
What it means for stakeholders
Available information is still sketchy, and the final structure and size of the deal depend on several factors, including demand from existing and new investors. But at this preliminary stage it seems likely that the company would enlarge its shareholding base by issuing new equity, while using proceeds to cut its debt pile to more acceptable levels; asset-light businesses such as CEVA in the transport and logistics arena typically boast thin operating margins.
This means Apollo is seemingly willing to be diluted, but is not looking for an immediate exit. CEVA noted it expects proceeds to be used “to repay debt, in order to deleverage the balance sheet to below 3x net debt/adjusted EBITDA.”
(Given its trailing financials shown in the table below, if Sfr1.3bn of fresh cash is used to redeem debt, net debt would be pushed down to about $750m on a pro-forma basis, for an implied net leverage of about 2.7x, based on 2017 numbers.)
As a result, its interest expenses would drop significantly post-IPO. Even assuming the same blended cost of debt (at about 11%), which will likely fall, the company could reduce reported losses significantly this year, after being in the red to the tune of $197m in 2017.
The net savings stemming from lower interest costs could amount to about $80m to $90m annually, which could imply net losses of just over $100m this year, if the IPO goes through. But the losses could be lower still if CEVA continues to deliver operationally, as it has done in the past few quarters.
More to come
There are two additional aspects: a financially stronger CEVA could use its more liquid equity to finance M&A – a possible scenario we assessed in October – but also management could be truly committed to completing the deal, which could mean accepting a lower valuation.
The equity valuations of all its global rivals have plunged after reaching all-time highs this year – mainly due to higher volatility in the financial markets (as gauged by the VIX index) – but most stocks are valued close to their records by historic standards, confirming the defensive characteristics of the sector’s major players, many of which today maintain a competitive advantage, given their unlevered balance sheets.
Meanwhile, an effort is being made in terms of corporate governance. CEVA said “a new board of independent directors will be elected, chaired by Swiss law firm Bär & Karrer partner Rolf Watter – “well-recognized in the Swiss market”. Other members will be nominated shortly, it added.
My key takeaway?
While macroeconomic risks persist, CEVA’s diversified business mix should encourage savvy investors, given prevailing trends in most of the industries where it derives its earnings and cash flows.
Is that enough to win over investors?
Based on the information available, CEVA could be looking to float a 25%-35% stake (this is unknown, and hinges on price), which would value its enterprise at between $4bn and $5.2bn (which, in turn, implies trading multiples of 13.2 to 18.5x, respectively, based on its enterprise value/adjusted EBITDA for 2017).
The low end/mid-point of that range could be good value indeed, although one source close to the deal commented that a $3.5bn total valuation would be an achievement, considering the dilution that existing shareholders would have to take.