Mergers & Acquisitions in the Transportation Industry – A 2015 Retrospective

If you are already working in this sector, you do not need me to tell you there have been significant mergers and acquisitions in 2015. More are expected and you may be affected. The blog today reviews some of these events.

If you have not been following this sector, you will find recent financial details that are astounding and outstanding. Do not be deceived by recent lower annual growth figures in this industry when they are reported only in terms of percentages. This distorts the real growth, as the annual revenues in this sector are so large.

Company revenues, in many cases, are growing rapidly year on year. The sector reported revenues, globally, totalling $750 billion in 2014. Thanks also, without doubt, to the fact that eighty percent of Fortune 500 companies use some form of logistics and transportation provider.

But, why have there been so many recent mergers and acquisitions in the Transportation industry? Answer – consolidation is a must to stay competitive. The key word is scale. This is heard again and again when executives in this sector are interviewed.

Participants and Key Players

The participants are the firms who provide logistics services to customers for part or all of their supply chain management functions. These third party logistics (3PL) providers typically specialise in warehousing and transportation services, scaled to customer’s needs. Sometimes a service provider also offers value-added services, such as production or procurement of goods, and is a third-party supply chain management provider (3PSCM).

Many of their customers are reviewing their Supply Chain Roadmap to allow it to fit better to their business strategies. By contrast, the end game strategy that has led to some of the recent mergers has left some observers puzzled. But of no doubt is the importance of these changes, especially when one notes the size of these mergers, both in terms of geography and their financial size.

These have included for example, CMA CGM taking a 67% stake in the APL container group for S$3.4bn. The CMA vice-Chairman stated that the focus is on “scale”, adding that this is now “more critical than ever to capitalise on synergies and capture growth opportunities whenever they arise”.

Although more freight is being carried, global rates for freight have seen a decline, but sharp declines (40%) in costs of bunker fuel. So for CMA CGM they saw group net profit over 9 months approach $613m as opposed to $392m in the same period last year.

Sector Inertia

DSV Group (subject to UTi shareholders approval that is expected Q1 2016) will acquire US based UTi Worldwide Inc., who operate in 58 countries with 21,000 staff and have revenues of US$3.9 billion. Once again, ‘scale’ is the word used by the UTi Chairman.

However, there are now reports a rival bid may appear. DSV had stalled on the acquisition plan some time earlier when reports in the financial press caused a share price rise in UTi stock. The share price then fell following revised UTi profit forecasts.

Then there is Kintetsu World Express and their purchase of APL Logistics. Singapore NOL selling its APL Logistics division, making the transaction one of the largest in recent years. The state owned shipping line of Singapore will collect $1.2 billion from the sale.

This will give Kintetsu a much larger footprint. NOL were keen to point out that when calculating a purchase price based on a company’s financial results, the sale price obtained was well above the current market average for acquisitions in the sector. NOL sold both its logistics arm and shipping line business this year.

Further inertia in the sector was proved with announcements from FedEx confirming plans to acquire TNT Express for $5 billion. Confirmation is expected in the spring of 2016. This will make the combined company the second largest delivery service in Europe.

TNT shares rose 10 per cent when reports surfaced, saying a green light is expected from the EU antitrust regulators. A formal declaration is due by mid-January, although UPS continues to lobby against this acquisition. The firm tried to buy TNT three years ago but were stopped by the EU Commission, due to the estimated 30 per cent control they would be seen to have of the total market.

Why now?

It will not come as any surprise that mergers and acquisitions are seen as the vehicles of choice to build company size. But these logistics companies are themselves seen as targets, with potential, by private equity investment firms.

Changes in the global financial markets may have led to brakes on acquisition plans prior to 2014, until such time that target company share prices had become weaker, or rather, not seen as being over-priced. This, together with other factors, has meant that 2015 has been a bumper year for M&A.

As if to confirm the pace of announcements, Japan Post recently announced they would buy Toll Holdings of Australia for $5.07 billion. Toll has come a long way from its roots in 1888 in New South Wales, delivering coal!

 

3PL companies are being asked by many of their largest customers to supply more services, and indeed many want to and know they have to. Companies want to offer a wider range of services to make them the one and only provider of transportation services to these major customers. This objective makes a wider geographical footprint a must have, and this, along with recent private equity involvement and strategies, also explains the 2015 dynamism in the sector.

Acquisition provides an easier route to achieve many of these aims, albeit with potential staff repercussions that are seen in any industry. Most commentators agree that these changes will continue. Whether the financial benefits that result from an acquisition match the forecast is another topic, but by that time the seller is out of the equation.