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Danish 3PL and road haulage company DSV is a strong business that needs growth – inorganic growth, most preferably – based on its merger and acquisition (M&A) track record.

Options are thin on the ground, however, and unless DSV stretches its finances, it will be unlikely to be able to deliver the kind of returns investors expect from a business whose five-year performance on the stock exchange reads +132%, excluding dividends.

Since the stock market rally started in March 2009, its shares have surged 360%, helped by bolt-on acquisitions and larger deals.


Quarterly and full-year results released on Friday were disappointing for a stock market darling that has grown over the years, showing rivals and investors how flawless execution in M&A is carried out: by snapping up low-margin businesses and turning them into more profitable assets.

DSV must do something and sooner the better. 2014 revenue rose to Dkr48.5bn ($7.37bn) from Dkr45.7bn, but gross profit was essentially flat at Dkr10.2bn ($1.55bn), yielding a 20 basis point drop in operating margin to 5.4% from 5.6%.

Gross profit, operating margin and free cash flow are predicted to surge in 2015, according to DSV’s guidance, yet trailing results show a proposed dividend of Dkr1.6 (up from Dkr1.5), which came in below consensus estimates, while adjusted free cash flow was at Dkr1.7bn ($258m), almost 20% below 2013’s level.

Of its three divisions, the core air & sea freight forwarding unit remained the best performer, with quarterly operating profit before special items rising to Dkr399m ($60m) from Dkr382m, while the smaller supply chain solutions business recorded operating profit of Dkr90m ($13.6m), up 40% from last year’s Dkr64m.

The road division’s operating profit, however, was down 22.6% to Dkr174m ($26.4m) from DKr225m.

Trends weren’t dissimilar for its annual results. Across its three units, DSV is finding it more difficult to deliver return on invested capital in line with its stated goals.

Balance sheet

It appears evident that DSV needs to buy rather than to build at this economic juncture. DSV executives realise this, although the paucity of takeover targets remains a fundamental obstacle.

The balance sheet is well capitalised and could easily be loaded with $1bn of debt, for an implied pro-forma net leverage of about 4 times, although any large deal would have to comprise a large chunk of DSV’s expensive equity.

“At 31 December 2014 the average duration was 4.6 years”, for banks loans and corporate bonds, according to DSV’s 2014 annual report.

The group’s target for net interest-bearing debt to Ebitda before special items stands at about 2 times, but DSV’s “net debt to Ebitda (before special items) ratio may exceed 2.0 in certain periods due to acquisitions”.


It is clearly the right time to entertain M&A, although the risk for shareholders is that it will pay over the odds to secure certain assets such as US forwarder UTi Worldwide, which was approached last year and is currently in the midst of a comprehensive cost-cutting exercise.

The fact that the parties were unable to take talks beyond a preliminary stage tells its own story.

UTi is a nice restructuring play, and promises hefty revenues and cost synergies, so DSV may be tempted to make a comeback. The allure is obvious, but UTi would cost about $1.8bn, including debts – equivalent to about one third of DSV’s enterprise value. That’s a lot, given that UTi would be almost double the size of DSV’s transformational acquisition of ABX Logistics in 2008.

In order to shore up its equity valuation, DSV announced on Friday a stock buyback of up to Dkr200m, which is not exactly the best way to deploy shareholders’ funds at this point in time — one of the reasons being that DSV stock hovers around its all-time highs, and is pretty expensive based on trading multiples. The longer it waits, the more difficult it may become for DSV to snap up a decent assets using its stock as M&A currency.

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