Snapshot: One-year record DSV is here! However...
Love the soundtrack, hoping for some resilience
A few things caught my attention when the $1.35bn acquisition of US-based UTi Worldwide by Danish 3PL and road haulage company DSV was announced last week.
First, the timing of the deal is smart as it precedes a quarterly update on October 28 that might have left a bitter taste in the mouth of DSV investors.
True, DSV is in great shape, but it has been spending a lot of cash recently to buy back its own stock, which has become increasingly expensive, and means rapidly rising returns could become more difficult to achieve.
Furthermore, the deal offers DSV a great opportunity to expand its footprint in the US, where overlap with UTi is minimal in terms of logistics facilities – two for DSV against 48 for UTi – while targeting synergies in Europe, where I would expect substantial savings to be made if the acquisition goes ahead.
The deal is expected to close in the first quarter of 2016, when the financials of DSV will accordingly reflect the integration of UTi.
The Loadstar has already covered the strategic merit of the takeover, so here I’ll focus on the financial and economic aspects of the acquisition.
To recap, here is my previous coverage of DSV:
A couple of weeks ago I had a chat with a US-based analyst – “freight forwarders need volumes,” he argued, while debating the prospects of UTi, whose equity, I argued, could have fallen to nothing over time if the company had decided to move forward without a solid partner. We both agreed that its working capital story was not set to last any longer than a couple of quarters. My feeling was, quite simply, that UTi is on a wing and a prayer.
When the takeover was announced, UTi said it was currently operating in an industry “where scale is critical”, and that was one of the reasons why its board recommended DSV’s rich offer. While some analysts believe UTi could still receive a rival bid, I doubt anybody would be in a position to offer more than $7.1 a share, which already looks very generous.
While it is true, as DSV says, that the acquisition gives it “a more balanced exposure with regard to geography and business segment,” it looks like the Danish group is paying over the odds to gain scale, based on UTi’s fundamentals, and betting on synergies in order to deliver value to its shareholders.
Investors do not seem concerned about the price, if DSV’s 7% stock price rise since the announcement is anything to go by, but also because they have faith in DSV management, which boasts a strong track record in execution.
The take-out price is not particularly high if you pay attention to the implied valuation disclosed by DSV – 0.34x trailing sales.
The problem is that UTi is burning cash, doesn’t generate a penny from its operations and its financial position has deteriorated fast in recent years, during which the freight forwarder has accumulated significant losses. DSV has paid a hefty 50% premium to receive the backing of UTi board, and that makes sense only if the potential cost synergies, which are appealing on paper, will actually be delivered.
The deal is expected to be EPS-accretive “in a year two after closing,” DSV says, and job cuts will have to play a big part in achieving that, in my opinion.
Financially, DSV is strong enough to be able to decide to finance the deal via debt, equity or a combination of both, although management indicated last week it would raise fresh equity, while its regular banks would “bankroll” the deal.
Ultimately, this is story about people. DSV will almost double its global workforce, and even though its revenue will surge by about 50% no adjusted operating earnings will be added to its Ebitda line.
In fact, on a pro-forma basis and pre-synergy, DSV will consolidate -$5m of Ebitda from UTi, while the number of employees will rise to 44,000 from 23,000, on a pro-forma basis. Thus its Ebitda/employee ratio will instantly halve to $11,300.
Deals are not done based on this metric, of course, but we have few details about the possible implications for employees. So I am forced to draft a best-guess scenario.
My colleagues wrote that the DSV chief executive Jens Bjørn Andersen declined to say where the axe would fall in terms of staff, offices and senior management.
“After closing, [the] impact of the acquisition will be communicated, including estimates of synergies and integration costs,” DSV said.
However, in order to maintain the same level of core profitability per employee, the combined entity would have to generate synergies equal to 13% of UTi’s $3.9bn revenue, or about $500m, but given the limited overlap of the two companies on a global scale, $300m of annual synergies could still be a very ambitious target – representing 8% of UTi’s revenue.
Assuming DSV can accomplish that, its global headcount might have to shrink to about 35,000. Consider that DSV is expected to report Ebitda just over $500m this year.
The rule of thumb in M&A is that the net present value of projected synergies must cover the takeover premium, but the question here is what multiple we have to apply to the $252m premium that DSV paid over UTi’s unaffected share price of $4.72 to determine possible cost savings. There’ll be revenue synergies, too, but those are difficult to predict.
This is a ‘guesstimate’ at best, but the geographical split of both firms indicates what could come next: a much lower number of offices in Europe and Africa as well as in the US. That could mean between 10% and 20% of the combined global workforce, or up to 9,000 employees, could be cut.
Of all the numbers about this deal, it that last which caught my attention – it is still entirely speculation of course, but “cost synergies” ultimately mean jobs will go: the question is how many?
SEO analytics firm Hedging Beta has produced a preliminary analysis of the key website metrics of DSV and UTi. See how two of the companies compare in terms of their web presence and whether they are offering their customers a truly unique web experience.
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Comment on this article
emmanuelJune 01, 2016 at 6:52 am
Dsv it’s going to take code 14 south Africa drivers,permanent, because the are working anders agents.