Jens Bjorn Anderson, CEO of DSV asserted last week that the company has a “clear intention” of expanding “additional acquisitions, provided that we can find the right candidates”. So why is DSV so keen to consider acquiring another logistics company? Perhaps the easiest answer is that it has nothing else to do with the money. Although the company has a debt gearing of 1.9 EBITDA this is within the financial target that it has set itself. So much so that DSV has just embarked on another share buy-back programme worth 0.85% of the capital of the company or approaching €26m. Not a huge sum for a company making DKK2.6bn/€260m but an indicator that the company has surplus cash.
The other reason is that DSV has a good record in digesting acquisitions. Its last really big deal was the purchase of ABX in 2008. On the surface a company that had previously been part of the Belgian post office and had been bought by a British private equity company may not have looked the most promising prospect. Yet DSV successfully evolved a contract logistics business out of this deal, which last year had a profit margin of 4.8%, one of the better performances of the large contract logistics providers.
DSV also has another reason why it might look to expand by acquisition. Its growth is not very high. Overall DSV revenues grew by 5.5% over 2014 whilst EBIT was up 2.9%, both figures were flattered by the effects of currency movement. Although DSV appears to be growing faster than the markets it is present in, it is important to note that those markets are not growing very fast themselves. According to DSV the road freight and contract logistics market in Europe is growing at only 2% a year, while the air and sea forwarding business is becoming less profitable.
Whilst freight forwarding is reasonably balanced in terms of geographical exposure, the contract logistics ‘Solutions’ business is 97% based in Europe, with a big portion of its activity in Southern Europe. This means that DSV is not necessarily exposed to some of the most promising prospects in the global contract logistics market.
Building up a presence in the sorts of emerging market that are amongst the best prospects through organic expansion would take time and would be difficult, not least as local knowledge is invariably key to success in such idiosyncratic places. Therefore the apparent solution is to buy a company that is strong in high growth locations and use DSV’s demonstrated management strength to exploit the opportunities. The good news is, that there is no shortage of high-quality companies available. DSV has already run a rule over UTi which fits the bill quite well but there are others. CEVA and Panalpina are both very big LSPs with a presence in fast promising geographies whose purchase would transform DSV into a leading global logistics provider, however they would be enormous acquisitions whose size alone would be likely to deter DSV’s management. The list of smaller LSPs that are potential targets is long but buying these in emerging markets can be a risky business. So it might be suggested that DSV needs to find a western based mid-market LSP with exposure to interesting niches in emerging markets.
For more information and insight about mergers and acquisitions activity please take a look at Ti’s latest European Logistics: Mergers and Acquisitions 2014 report.