A major trend in the container shipping market has been the attempt by carriers to add value to their existing business models by extending their scope beyond port-to-port operations to encompass end-to-end services. This is not a new phenomenon; Maersk and others have been offering their customers freight forwarding and consolidation services for many decades. This brief outlines how shipping lines are playing a bigger role in market consolidation and what role private equity has assumed in facilitating deals.
CMA CGM buys CEVA
The stand out example in recent years of a shipping line expanding into this value adding sector has been CMA CGM’s ‘blockbuster’ acquisition of CEVA Logistics. In the first quarter of 2019 the French shipping line acquired the global logistics provider for reportedly over $1.2bn.
The problem that both CMA CGM and CEVA have faced since the purchase has been the difficult market environment caused by the Covid-crisis and especially its impact on key sectors such as automotive and technology. Although CEVA’s new CEO has commented about how the freight forwarding operation needs to maintain its distance from the shipping business of its parent company. This alludes to the innate tension which exists between asset heavy shipping lines and asset light, freight management companies whose job is to find the best solution for their customer, rather than provide volumes for its parent.
Maersk acquired KGH Customs Services in 2020 as part of its strategy of diversification. Expanding into customs brokerage makes sense as part of Maersk’s strategy to increase the value from marine based logistics although presumably it will need to be integrated with its existing customs brokerage, not least that of its erstwhile freight forwarding brand, Damco. Certainly, KGH will have the opportunity to extend its business globally.
What the deal does highlight is that niche activities in logistics can be much more profitable than the often volatile returns in container shipping. If Maersk really can stretch a business such as KGH across its global operations, it might be a useful addition to its bottom-line.
The transport and logistics industry has attracted considerable interest from Private Equity (PE) companies in the past few years. Part of the interest is the growing acknowledgment that transport and logistics plays a fundamental role in key aspects of the economy, not least in the fast development of e-retailing logistics.
The Otto Group sold a controlling stake in the parcel carrier Hermes UK in August 2020, along with smaller parts of its last-mile operations in Germany, to London-based private equity firm Advent International. The deal was structured so that Hermes was established as an independent company, with the statement from Advent commenting that it would partner with the existing management team.
One of the key issues has been the ability of Otto Group to support the considerable capital investment requirements of Hermes which is struggling in the face of meagre returns in the last-mile sector and the threat of competition from large global competitors.
It seems likely that Advent was attracted to a sector which is experiencing rapid growth and which appears to have almost unlimited potential. However, whilst the pricing environment may have eased a little with many e-retailers now willing to charge shoppers for delivery, the level of competition is growing.
However, not all deals go to plan. The full paper explains how Japan Post’s acquisition of Toll Group caused unforeseen consequences and difficulties.
There have also been significant numbers of deals made by companies acting ‘on trend’ which have disappointed management and shareholders. As was mentioned in Part One of this series, strategies which include building ‘one stop shops’ and filling in geographic ‘white spots’ are particularly risky as managers can come under pressure to make deals regardless of the quality of company which is being bought. If an acquired company turns out to be struggling it is often impossible to turnaround its performance as this requires specialist managers as well as time and resources, especially difficult if it is based in a foreign market. Instead of being value accretive and bringing benefits such as cross-selling or economies of scale, these companies become a massive drain on resources and eventually are written off or quietly sold.
Source: Transport Intelligence, February 11, 2021
Author: Transport Intelligence
This brief has been taken from a larger paper, ‘M&A Activity in the Global Logistics Industry – Part 2’ written by Ti’s CEO, Professor John Manners-Bell. The paper is available exclusively to GSCi subscribers. Each week, Ti’s team of senior analysts and industry experts deliver analysis covering the latest logistics and supply chain trends exclusively to users of GSCi.