Goldman Sachs buys into Neovia despite debt load

Neovia Logistics, the logistics company formerly known as Caterpillar Logistics Services, has seen the transfer of a majority of its equity from the ownership of the private equity company Platinum Equity to Goldman Sachs. The details are unclear, however it seems from press reports that Goldman has paid US$1bn for the Platinum stake, which if accurate, would represent a considerable profit for Platinum.

Reports on Reuters state that there has been an auction for Platinum’s equity holding between a number of potential investors including Blackstone LP and XPO Logistics with the Goldman Sachs private equity subsidiary, Rhone Capital, successful in its bid.

This leaves Neovia owned by two shareholders, with Rhone Capital holding 65% of the company and Caterpillar owning 35%.

This development is an insight into the dynamics of private equity investment in the logistics sector. Two years ago Platinum paid an estimated US$750m for its stake in the company. Such an amount was regarded as high with a number of other investors refusing to consider the offer to buy a majority stake even at a price considerably lower than this.

However what Platinum has been successful in attaching debt to the company in order to generate returns for itself. Notably it issued $125m of corporate bonds in Neovia earlier this year, triggering a downgrade in the credit rating of the holding company by Moody’s rating service from B2 to B3. The rating agency described its reasoning for this as being that “debt to EBITDA is estimated to increase from approximately 5.4 times at December 2012 to over 6 times pro forma for the newly issued notes.”

Neovia is estimated to have well over $600m in corporate paper even before the most recent issue and not counting other liabilities such as pensions and property leases. Yet this debt load has enabled the shareholders to pay themselves a large dividend, presumably divided along the ratios of equity ownership.

Neovia Logistics has a respectable portfolio of physical assets across the globe, including in China, something which was in great part driven by the Caterpillar’s aftermarket parts operations requirements. However its capabilities are by no means unique, with many larger logistics service providers in direct competition with it. Combined with the fact that the automotive spare-parts logistics market in developed markets is quite mature, its growth prospects are by no means straight-forward. To add such a substantial debt to such a company might be described ambitious.