Extensive CEVA restructuring in the face of weaker markets

The continuing downturn in profits at CEVA has triggered a major ‘debt for equity swap’ and an effective change in the shareholders of the company. CEVA’s owners, the private equity firm Apollo, have joined with two other financial companies, to both reduce its debt and inject capital into the business. One of these companies is known to be Capital Research and Management.

These two companies were both major holders of CEVA’s higher interest bonds and they have agreed to participate in the restructuring, swapping a total of €1.2bn of bonds for an unknown proportion of the equity in CEVA. The effect will be to halve the company’s interest payments, worth €135m. CEVA is also in continuing negotiations with its other creditors.

The results for 2012 certainly had some concerning aspects. The company was cash-flow negative to the tune of €241m for the year, much of this driven by net financing costs of €284m, up €60m compared to 2011.

Also concerning was the performance of the underlying business. Although revenue for both contract logistics and freight management continued to grow by 4% and 6% respectively – giving an overall revenue of €7,224m up 5% – profits fell heavily. ‘Adjusted’ EBITDA fell 22% at €251m with a particularly notable fall of 24% at Contract Logistics.

Explaining the fall in profits CEVA’s CEO, Marvin O. Schlanger, commented that although “we have grown our CL (Contract Logistics) business we have faced a number of broader industry issues as well as reflecting wider economic weakness for example in southern Europe”. Speaking to Ti, he pointed to a trend in the sector towards more sophisticated services that had not been reflected in the nature of the pricing model. Certainly, CEVA appears to have a number of underperforming contracts which Mr Schlanger said were being either terminated or renegotiated.

More predictable was the performance of freight forwarding which Marvin Schlanger said was hit in particular by air freight which saw both falling volumes and rate compression.

Asked if the departure of both the company’s previous CEO, John Pattullo and COO, Bruno Sidler, had effected the downturn in performance Marvin Schlanger who has only been in the job six months, commented that the “company is a lot bigger than one or two people. The environment we find ourselves in was quarters or years in the making and industry-wide not specific to CEVA”.

In addition to the reduction in interest costs that will result as a consequence of the restructuring, investors have also agreed to inject €205m of capital into the business. This is to support the requirements of CEVA’s business plan which Mr Schlanger said would be focused on better strategic execution including the “flexibility to make CAPEX investments and accelerate growth.”

A further interesting comment from Mr Schlanger concerned the withdrawal from the prospective IPO.  This was “strictly administrative” and required just to “facilitate the refinancing”. An IPO on the New York Exchange is still part of the company’s strategic plan.