Ceva reorg accelerates as rumours give way to action
On the move
Merger and acquisition (M&A) activity goes in cycles, and the current spate is due neither to loose credit conditions nor executives’ big egos – rather, it’s M&A of necessity.
And while the topic remains hot, it is always interesting to wonder who may be next on the auction block: this week’s target tip is US freight and logistics firm Con-way – and not only because of uninspiring, mixed quarterly figures, released yesterday.
In short, it slightly missed estimates from analysts. Freight revenues were flat, but core profitability doubled, while logistics showed a similar pattern, with slightly higher revenue growth but a lower increase in income from operations. The smaller truckload business was down both on revenue and operating profit, but there’s a key message here: “drivers wanted, apply now”.
“Operating income in the quarter improved despite higher wages and benefits from previously-announced driver pay increases,” Con-way said, adding that the driver shortage crisis was “limiting” its “ability to fully seat” its fleet.
Although events are unpredictable, additional capital should not be needed right now. Con-way’s balance sheet looks solid, but investors remain dissatisfied – its share price is down 6% since the most recent round of results, and more downside is apparent.
Short-term volatility in Con-way stock should not dictate strategy, of course, yet value investors are no different to corporate clients – they welcome long-term relationships, but only if they pay off. A change of ownership would be in their interest.
This week, at the Multimodal event in Birmingham, the industry gathered to talk about strategy and how critical it is to retain clients and grow portfolios, either organically or via M&A. At next week’s Transport Logistics show in Munich, the main topic will likely be the same – and Europeans are looking westwards for new business.
On 23 February, The Loadstar wrote: “Questions are being raised on company valuations in the industry after two large merger and acquisition deals were announced last week.”
“In both Japan Post’s $5.1bn takeover of Australia’s Toll Group and Kintetsu World Express’s $1.2bn purchase of APL Logistics from its Singapore parent NOL, the price-to-earnings multiple suddenly jumped around 50% in the space of a week.”
Then, FedEx’s €4.4bn takeover of TNT Express was announced.
Con-way, with its market capitalisation of $2.3bn, must have noticed that deals were being done in the $1bn-$5bn range – and at highly attractive multiples, which means it ought to be easy for the company to attract new investors and access debt or equity capital, or find itself subject to a blow-out offer from a trade buyer.
An obvious target
The window to strike deals may close in a flash, so any seller eager to offload debts onto the balance sheet of a larger, combined entity is just as lucky as any buyer that has a chance to boost earnings by exploiting cost savings stemming from deal making. It could be a win-win.
At a time when companies with relatively high debts, such as Norbert Dentressangle (ND), find buyers willing to pay hefty premiums to bulk up internationally, for others such as Con-way it is a great opportunity to facilitate a deal.
Admittedly, XPO Logistics isn’t taking huge risks with ND, as the two businesses are complementary, and it grabs the accounts of the target, which boast an outstanding retention rate. That’s why XPO decided to bid up for ND’s valuable assets.
Of course, the purchase could come from the other direction: Danish 3PL and road haulage company DSV has the financial wherewithal to place a top-dollar bid for Con-way, but if such an opportunity interests it then speed is of the essence. The same applies to a less obvious strategic buyer, Switzerland’s Kuehne + Nagel.
The XPO/ND and the Con-way “read-across”
When XPO Logistics announced yesterday that it would acquire ND for €3.2bn (including €1bn of net debt), offering a cash premium of 34%, its own stock rose 16% as the combined entity will almost certainly deliver rising growth rates, while loading the balance sheet with manageable debts – which are likely be refinanced at a cheaper rate anyway. Morgan Stanley has provided a financing commitment for up to $2.6bn, XPO said.
Con-way could be a palatable target for European buyers seeking grow in North America to boost their own valuation via an accretive deal. Its stock is cheap, based on trading multiples, and currently trades in line with the level it recorded about a decade ago. It isn’t as troubled as other US rivals, such as UTi Worldwide, and it is trying to become a more efficient entity.
Even though it missed estimates from analysts, there’s some growth in the business.
Financially, the bad news is that Con-way’s parts – freight, logistics and truckload – are worth between 15% and 35% less than the whole, depending on certain assumptions, according to my SOTP [sum-of-the-parts] valuation, so management may find it difficult to facilitate a takeover by engineering a break-up.
Better news, however, is that buyers may be enticed by its asset base, and Con-way isn’t faring too bad operationally.
However, it is unlikely to fetch as high a take-out multiple as ND did. Should it receive an offer, applying the valuation for ND, its enterprise would be valued at $5.2bn, for an implied premium of more than 100%.
(XPO valued ND at 9.1 x forward Ebitda, excluding synergies, and that multiple doubles Con-way’s own EV/Ebitda valuation, even assuming cost synergies render ND a less expensive target.)
Such a high price tag is virtually impossible to achieve, but then Con-way could easily fetch a 30% premium, in which case its equity would be valued at $3.1bn, for an enterprise value of $3.4bn – which is bang in line with the value ascribed by XPO to ND.
It’s worth considering that Europeans have cash, and the plunge in the relative value of the euro against the dollar is taking a breather. They lack growth, though.
DSV has been chasing UTi – which, including net debt, could cost between $1.5bn and $2bn – without success since last summer. Hence, it could well approach Con-way, whose operations are in better shape and which would cost more than UTi, but would need less work.
On the one hand, Con-way’s freight and logistics units are similar in size to UTi’s, in terms of revenues. On the other hand, the values of Con-way’s current and total assets – as well as its market cap – and other financials aren’t much different from those of ND, although Con-way’s are much heavier, as far as certain fixed assets are concerned.
The other factor is that the operational profile of UTi and Con-way remain different – the former is much more of traditional freight forwarder, the latter has focused on the twin businesses of contract logistics and trucking – and should DSV make a move on either, there will be a strategic reckoning to undertake
Meanwhile, DSV’s own valuation has risen more than 5% over the last 48 hours and isn’t too far away from its 52-week high – the market knows the Danish company won’t sit idle for long.
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