The role of Private Equity in Logistics M&A

The proposed takeover of Christian Salvesen by Norbert Dentressangle illustrates that the market for mergers and acquisitions in the logistics sector continues to be strong. The industry's low margins and tough competition is determined by the eagerness of so many small and mid-size hauliers to grow either by cutting margins or by buying their neighbours.
But trade buyers are not alone. Figures available to TI suggest that around a third of the deals (by volume, not value) executed in the road freight and contract logistics sector over 2006 involved private equity (PE). However the nature and size of the PE deals are quite different to the vaulting ambition of the big trade buyers, such as Deutsche Bahn, Kuehne + Nagel (K+N) or DPWN.

Of course there are exceptions, the biggest of which, of course, is Ceva/EGL created by the London based equity firm Apollo. But this highlights why ambition may be so rare in PE deals in the sector. Ceva has a huge debt burden which it has struggled to fund. Whilst its growth and operating profits have been respectable they are swallowed up by the cost of interest.
Ironically the really big deals are dominated by the infrastructure funds, such as the purchase of OOCL's container terminal business by Ontario Teachers Pension Plan or Associated British Ports by Goldman Sachs. But here the criteria are different, with pension plans actually attracted by the size of capital investment required.
What conventional private equity really likes is to take a business with sub-optimised potential and groom it for a sale. A good example of this is Platinum Equity's purchase of Hays Logistics in 2004 and its sale in 2006 to K+N as ACR Logistics. The company was rationalised and put on a sufficiently stable footing for K+N to pay an attractive premium - but essentially it was an 'arbitrage' deal.
Private Equity now dominates a huge part of world's economy, but its nature should be understood. If it is big vision that is required in the logistics sector - look elsewhere.
TI's latest report on Mergers and Acquisitions in the global logistics industry – Global Logistics Strategies 2008 - is published next week. Contact Sarah Smith to reserve a copy. ssmith@transportintelligence.com.