Damco

It is easy to suggest that DSV could soon bulk up inorganically and, consequently, just as I noted in in my latest coverage, it’s easy to understand why M&A can be a powerful tool for the Danish forwarder.

However, identifying suitable combinations is more problematic. As there is a paucity of sizeable acquisitions that could quench its M&A thirst, how about instead an incredible twist in the ending of this corporate story, with DSV itself being targeted?

Deep throat

It all started last week, when a gentleman involved in M&A affairs gave me a detailed overview of the likely problems DSV is about to face on the stock market, given what is happening in the background.

(We know it needs inorganic growth to boost its stock, but bolt-on deals – say up to $500m – won’t be effective. Investors want more) My new contact calmly pointed out – sadly without providing any hard evidence – that Damco remained one of DSV’s chief takeover candidates.

I also heard that DSV is perfectly ready to start negotiations, but, he added, the freight forwarding arm of Denmark’s AP Møller-Maersk Group is not up for sale because the conglomerate wants to grow it – and, believe it or not, it also wants it to become acquisitive.

That really got my attention. Yet, soon as I hung up, I wondered: does any of this make sense?

Damco

Damco – my estimated fair value is up to $2bn – has been a rumoured takeover target for almost two years, but it is not exactly the kind of business, size-wise, that DSV should snap up, in my opinion.

Hellmann Worldwide Logistics is, however, given its volumes in air and sea freight. The German company could be a hard bite to swallow and it is not on the block, but everything has a price and a cheque of $3.5bn could test the nerves of the owner.

The logic is simple: DSV has quickly added $10bn of market cap to its valuation, currently at about $16bn. If it acquired Damco, it might have to find a much larger target, to grow inorganically again, in less than 36 months. The more it grows and its market value surges, the fewer targets there will be.

Damco handled 664,448 teu in 2017 (2016: 659,687; +0.8%), which comfortably made it one of the top 20 forwarders in the world, but its air freight volumes (206,208 vs 190,674 in 2016; +8.4%) were not particularly meaningful, based on global rankings. It lags top 20 worldwide entry by some distance, based on Transport Intelligence data for 2016 and my own calculations for 2017.

Also, both units grew below market rates, as gauged by the performances of the leaders, although Damco also generated about half of its $2.6bn revenues from supply chain management, warehousing and other so-called “value-adding services”.

Tie-up

Given buoyant trends for air freight growth, and the size of DSV’s own operations in that segment, a combined DSV/Damco entity would closely challenge Expeditors in terms of air volumes, closing the gap on larger players such as Panalpina and UPS, which follow the top three in the rankings.

Enter Hellmann, which almost triples Damco’s size by air volumes. Its contract logistics operations, too, are enjoying friendly trends and could be a nice add-on.

In ocean, Dachser and Geodis are two alternatives for DSV, but given that I understand both have M&A plans, they are unlikely to blink. The Danish forwarder might be left with the option to grow inorganically, which could be a headache given its own performance in ocean freight and latest trends for gross profits by teu.

Damco would be a nice add-on, but its ocean volumes are about one-third lower than Hellmann’s – moreover, the German company boasts smaller ocean operations than DSV, as gauged by volumes (1m teu vs 1.4m teu), but a very similar air businesses in size, by volumes (annual tonnes for both stood at between 600,000 and 650,000 in 2017). Could this be a match made in heaven?

What if…

Hellmann started its own restructuring two years ago, and 2017 numbers showed some improvement, in terms of profits. There are nice overlaps by business segments with DSV; take road freight and contract logistics.

But then, five years from now, say with Hellmann under its belt, how could DSV – at that point likely worth $25bn or so in market value – grow inorganically?

Then something else sprang to mind.

Surely, its oft-rumoured target, Damco, can chase M&A ambitions. That is understandable in the current market, but I think the management team of parent APMM should consider carefully what they plan to do with the unit first, while paying attention to stringent funding requirements for Maersk Line, its core business. That might have not been thought through properly, given market conditions.

Time and again, a lack of coherent strategy for Damco has been problematic, and if APMM ($28.5bn market cap) wants to grow its asset-light assets – which play a key role in the digital disintermediation of assets, contracts and services – why not approach DSV directly ($16bn market cap) and take it over?

Dilution

Given their relative valuations, at a glance the deal is unlikely to make much sense financially for APMM, but strategically it would open up a completely different game for container shipping companies and forwarders alike.

DSV is a well-oiled machine that could do all the work related to the integration of Damco. Of course, DSV’s current management would stay put, and that should be hardly a problem for APMM. No changes whatsoever would be required and DSV managers’ expertise and efficiency could be exploited.

Moreover, DSV’s steadily rising cash flows would nicely shore up the dividend of APMM, once its restructuring is complete. The only big hurdle is the dilution that the Maersk family, a dominant shareholder, would have to digest. But if they recall what happened to the Peugeot family in the aftermath of the 2008 crisis, they would do well to gauge all the options until Maersk Line is sustainable in its current form.

If the answer is “no deal”, there remain plenty of capital deployment alternatives for DSV, with higher dividends and buybacks naturally topping the wish list.

Troubles?

Several of my stock market contacts have recently talked of DSV as if it could soon be troubled on the stock market. I dispute that idea, although its trading multiples imply very steep growth rates and more profitable growth, too, in future. Both, anyway, need M&A to materialise.

I almost forgot: the gentleman I talked to last Friday confirms the view that DSV is interested in the air and ocean freight operations of CEVA Logistics, as part of a deal where the contract logistics unit would be spun off (ideally to XPO Logistics).

However, he noted that Xavier Urbain, the chief executive of CEVA, would never let it happen.

It is more likely, he concluded, we would witness a merger between CMA CGM and CEVA at some point down the line, thanks to strong French connections that clearly favour a deal. Such deeper ties, of course, would reinforce the idea of a jumbo Danish deal.

APMM/DSV together is a stretch, perhaps, but only due to their current/forward financial metrics, which greatly favour DSV shareholders.

COMMENTS 2


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  • michael.pruden@gmx.net

    June 22, 2018 at 7:58 pm

    Do you know whether KWE might be a target?
    And you think Panalpina might be too big for DSV?

    Reply
    • a.pasetti@yahoo.co.uk

      June 23, 2018 at 11:42 am

      Hi Michael, thanks for your comment. I looked at Panalpina, too, and I don’t think it is too big for DSV. Also, in terms of market value, it’s a deal DSV could afford, but the controlling shareholders of PWTN are unlikely to bow if they are not offered a large stake in a combined entity. Unlikely. Most of the Japanese companies I cover (Nippon Ex, Hitachi TS, and KWE) have been looking around for some time, but again there aren’t many targets available. Specifically, KWE had a good 2017, with revenues up 16.6%, although projections are less impressive (it forecasts a 5.7% rise in sales and roughly 10% growth in operating profit. Its latest revised guidance, released on 11 May, is more bullish than implied in its original business plan announced in 2016). One to watch, but an unlikely target, IMO.

      Reply