By Gustaf Baavhammar and Chris Leung (University of Warwick), Felix Bacchetta (Wharton School) - Date: 20/02/2019
Overview of the deal
Estimated value: $4.1bn
Announcement date: 16/01/2019
Acquirer Advisors: Goldman Sachs, J.P. Morgan
Target Advisors: UBS
Denmark’s DSV launched a $4.1 bn takeover proposition for Swiss rival Panalpina who faces increasing pressure from Cevian Capital, Europe’s largest activist investor, to sell itself based on the company’s stagnating share price due to weak profit margins. DSV is offering CHF 55 per share coupled with 1.58 of its own shares for each Panalpina share, implying a 26.6x EBITDA multiple at a premium of 65% within the freight sector. Although a steep premium, shares of the Danish logistics company rose 5% to DKK 498 on the announcement day. DSV boasts being the world’s fifth largest freight forwarder behind industry giants DHL and Kuehne + Nagel, following rapid growth in recent years elicited through a series of acquisitions, with Panalpina being the next target. Panalpina’s operating margin sits at roughly 2.6%, far below DSV’s mighty 7%. Even within air and sea transportation, which are Panalpina’s primary activities, DSV is significantly more profitable. However, according to Jefferies analysts, the acquisition is expected to add 50% to DSV’s revenue and 17% to EBIT in year 1. A deal with Panalpina would allow DSV to become the second largest industry player, as it would allow the NewCo to both reduce costs and realize managerial synergies.
“A combination of DSV and Panalpina would create a leading global transport and logistics company with significant growth opportunities and potential for value creation” - DSV
Company Details (DSV)
DSV is a Danish transportation and logistics company that offers transportation solutions via road, air, sea and train. Formed by nine independent Danish hauliers, the company experienced rapid growth and international presence through multiple acquisitions.
- Founded in 1976, headquartered in Hedehusene, Denmark
- CEO: Jens Bjørn Andersen
- Chairman: Kurt K. Larsen
- Number of employees: 47,000
- Market Cap: 95.239bn - EV: 99.09bn
- LTM Revenue: 79.05bn - LTM EBITDA: 5.9bn
- LTM EV/Revenue: 1.25x - LTM EV/EBITDA: 16.79x
* Currency in DKK
Company Details (Panalpina)
Panalpina is a Swiss provider of freight forwarding and logistics services, with concentration within the intercontinental air and ocean freight services.
- Founded in 1935, headquartered in Basel, Switzerland
- President and CEO: Stefan Karlen
- Number of employees: 15,000
- Market Cap: 3.63bn - EV: 3.67bn
- LTM Revenue: 5.91bn - LTM EBITDA: 141.2m
- LTM EV/Revenue: 0.62x - LTM EV/EBITDA: 25.96x
* Currency in CHF
Projections and Assumptions
Short term consequences
Despite the fact that the combined entity is set to generate expected revenues in excess of DKK 110bn and EBITDA of more than DKK 7bn, excluding synergies, shareholders have congregated into two opposing sides following DSV’s offer. On one side stands the Ernst Goehner Foundation, possessing a 46% stake, who are reluctant to sell. Contrastingly, several stakeholders in the other camp, principally Cevian Capital, owning 12.3% of the freight company, suggested a takeover is necessary, citing declining business in oil and gas industry, delays in implementation of new IT system and overall sluggish growth. DSV’s current proposition worth roughly CHF 170 a share is far below the board of Panalpina’s pain barrier, which when coupled with the fact that the Swiss company’s own shares rose by 31% to CHF 179.6 (slightly over DSV’s offer price) is indicative of a weak offer. This is further accentuated given that other companies also expressed interest in acquiring Panalpina, in particular, Kuehne + Nagel, another Swiss freight rival with alumni in Panalpina’s executive positions. However, Kühne recently addressed DSV’s bid for Panalpina as “hopelessly overvalued”, establishing that a counter bid is effectively unlikely. Despite this, DSV has sweetened its offer to CHF 180 a share, following Panalpina discussing “strategic opportunities” with Kuwaiti logistics company Agility Group. As waters in the freight sector heat up, DSV must be cautious not to slip into a bidding war. If the Kuwaiti rival submits a competitive bid, Panalpina may resort to paying a much greater premium.
“We strongly believe that Panalpina can create more value for its shareholders, customers and employees through its consolidator strategy than the published non-binding purchase offer from DSV,” – Thomas Gutzwiller, Ernst Goehner Foundation board member
Long term upsides
DSV’s initial bid yields one of the highest valuations in the industry since 2015 when the large competitors FedEx, UPS and XPO Logistics pursued several multi-billion dollar acquisitions. Hence, the proposed acquisition and the bidding war that ensued may prompt other logistic companies to pursue acquisitions, as well as private equity firms to gain interest in the industry. In the opinion of Evan Armstrong, president of logistics consulting firm Armstrong & Associates: “It’s a good time to buy and a good time to sell”, further clarifying: “It’s a good time to buy because capital is readily available, and it’s a good time to sell because the valuations are pretty good”.
Given how fragmented the global logistics industry is, as the 50 largest companies worldwide detain less than half of total market share, M&A activity could gain significant momentum, providing companies with opportunities to expand their service offerings, geographic coverage, or achieve cost reductions through economies of scale. DSV was already active during the previous consolidation wave in 2015, adding to its portfolio U.S.-based freight-forwarding company UTi Worldwide Inc. Furthermore, in 2018, DSV’s takeover attempt of Ceva Logistics was thwarted by French container-shipping company CMA CGM. In such an unconsolidated industry where companies are constantly aiming to comfort their market positions by achieving greater scale and operational efficiency, “the race is on to become a market leader,” in the words of Ben Gordon from investment bank BG Strategic Advisors. Thus, DSV’s rationale behind its attempt to acquire Panalpina relies in the merger’s potential ability to develop its air freight and shipping-line businesses, as well as grant the firm a stronger presence outside of its core European market, specifically in international energy transportation.
Risks and Uncertainties
Given the competitive nature of the bidding process, it remains uncertain whether or not DSV will be able to complete the acquisition. Indeed, Panalpina's largest stakeholder, the Ernst Goehner Foundation rejected DSV first bid, before considering the buyout of Kuwait-based logistics firm Agility. There remains, however, substantial skepticism around Panalpina’s ability to integrate a company of the size of Agility. So far, Panalpina’s M&A activity has merely consisted of smaller acquisitions, which present less operational risks for the Swiss company. Given that Agility is more profitable and roughly the same size as Panalpina “the idea that Agility is a target is almost fantastical” for Berenberg Bank’s Head of Transport & Logistics Research Joel Spungin. Spungin further adds: “It is marginally more likely that Agility may be a white knight bidder for Panalpina, or that it is prepared to consider some sort of joint-venture structure”. In the event Agility acts as a competing bidder instead of a target for Panalpina, still with the support of the Swiss company’s majority stakeholder, it remains less likely that DSV will be able to complete the acquisition. DSV, however, took the decision not to buyback its shares, which may indicate that the company is keeping its cash reserves in the hope of pursuing the Panalpina acquisition. Chief Financial Officer Jens Lund asserted that the firm’s profit redistribution policies to shareholders “will continue, as always, once this rather large issue has been resolved”, further confirming DSV’s confidence in completing the deal.
“It is marginally more likely that Agility may be a white knight bidder for Panalpina, or that it is prepared to consider some sort of joint-venture structure” - Berenberg Bank Head of Transport & Logistics Research Joel Spungin
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