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Following a class act is always hard, and for Adrian Coleman, chief executive of Wincanton, that is especially so after the stellar performance of previous chief Eric Born.
On the face of it, Mr Coleman doesn’t have an easy task, given that the logistics and haulage firm’s stock price grew by 412% since its record low of 34p in July 2012 – a performance that is attributed to Mr Born.
How about international expansion? Thanks, but no thanks – it has clearly been ruled out since Mr Born led its retrenchment to the UK and Ireland markets.
Rather, financial engineering could be the most obvious value-accretive outcome, and the obvious answer to the requirement to increase shareholder value is the possibility of a management buyout (MBO) led by a financial sponsor.
Any incremental rise in its stock value could be backed by a capital allocation strategy that favours financial discipline over short-term value.
Wincanton is a relatively small bite, its net leverage stands below 1x and its shares are rather cheap at 11x forward earnings. Moreover, its restructuring is done and dusted – all these are the perfect ingredients for a take-private deal.
Of particular mention, its net debt position has plunged from £160m in 2011 to only £57.6m in fiscal 2015, which testifies to the possibility of capital arbitrage – more debt, less equity on its balance sheet – and could certainly encourage private equity (PE) firms to entertain the idea of a buyout with the involvement of key Wincanton executives.
In the heydays of the credit crunch, net leverage of up to 5x/6x would have been conceivable for such a business, but any deal now would require some serious thought with regard to the resulting capital structure of the target.
A 30% premium on its current market price of 196p would imply a take-out price of £310m. That is a level of about 250p a share, which the group managed to reach shortly before Mr Born began its turnaround. At that point, the pressure to retain clients was immense as the group was in the red, but Mr Born was determined to get things right and pulled out of mainland Europe, with the mid-2011 sale of its German and Dutch operations.
A different beast
Wincanton has shrunk and changed a lot, becoming a different beast in fewer than five years.
“Defence is a sector currently under pressure so we can help them drive efficiencies.” Mr Born told The Financial Times in November 2012, less than two years after his appointment as chief executive. His strategy made a lot of sense: the A&D sector was in distress and promised higher margins than those of Wincanton’s core operations.
Now, the group would fit with PE, which has deepening ties to the sector, with Carlyle spearheading the pack across the Atlantic. Assuming our proposed structured (50:50 debt/equity), an equity cheque in the region of £150m would be small change for TPG, one of the biggest players in the PE world, as well as for CVC Capital and Apax Partners, which recently acquired Quality Distribution for $800m, paying a stunning 63% equity premium.
In January, Wincanton was awarded a new contract by BAE Systems “to provide full logistics and warehousing services in support of its UK shipbuilding operations”. Supply chain management has increasingly become an advisory job these days, which lowers the boundaries between financial sponsors and corporate clients. Hence, execution and integration risks diminish under a buyout scenario.
Any PE-led deal might have to carry a conservative capital structure if the resulting group aims to withstand the vagaries of the global economy, yet assuming a financing evenly split between equity and debt, the resulting net leverage would be just above 3x on a pro-forma basis.
Then, assuming a blended rate at 5% on the debt portion, Wincanton will likely remain in the black in year one and will be able to service higher interest payments. A debt structure including a grace period could facilitate the deal.
This scenario is enticing, but comes with caveats.
Wincanton is exposed to the retail and construction sectors, among others. Although construction has complementary peaks to retail, as the group points out, those trends have become less easy to predict as several food retailers are in dire straits, while the construction sector is on a roll that may not last forever.
Of course, Wincanton could try and make it through challenging market conditions on its own – but then, what would be the best way to deliver value?
Investors have been keen to buy into its stock in recent years, based on expectations of rising dividend payments. When it reported its full-year results, the group said that “no dividend” was recommend for the year, “however the board will assess on an ongoing basis when it judges it to be in the company’s interests to recommence a dividend payment to shareholders”.
Dividend payments should be preferred to buybacks when it comes to long-term value, but then the only alternative that springs to mind is – dare I say it? – to approach its rival Stobart and see how its management team feels about combining their assets.
Mr Born, who joined Swissport International as chief executive and president in early August – at the same time as Mr Coleman took the helm of Wincanton – would have likely considered such an option at this critical economic juncture. As a finance man, that’s not an option easy for Mr Coleman to rule out either.
On an associated issue, SEO analytics firm Hedging Beta has produced this comparison of the website metrics of Wincanton and Stobart. See how two of the UK’s largest logistics and haulage providers compare in terms of their web presence.