A Truckload of Money for a Freight Company

In M&A, it’s always good to have a Plan B. Danish logistics group DSV A/S has now come up with a credible alternative to its failed attempt to buy Ceva Logistics AG last year — a 4 billion-franc ($4 billion) tilt at Swiss peer Panalpina Welttransport Holding AG. There’s a clearly of lot of value trapped inside Panalpina. DSV can afford to pay up for it.

Panalpina’s small size in an industry being battered by a trade war is becoming a major hindrance. It would struggle to acquire scale on its own. The natural answer is to embrace a suitor.

The industrial logic of this potential tie-up rests on reducing costs and introducing better management. Panalpina’s operating margin is about 2.6 percent and DSV’s nearly 7 percent. In air and sea transport, Panalpina’s main activity, DSV is even more profitable. Assume the acquirer can lift the target’s margins to something closer to its own, and the jump in operating profit would be considerable. 

Margin for Improvement

DSV is spying the chance to bring Panalpina's lowly operating margin in line with its own

Source: Bloomberg

True, DSV’s performance is unusually strong for the industry. And Panalpina’s perhaps unwieldy ownership may explain some of the disparity: The company is 46-percent controlled by a philanthropic foundation, although activist shareholder Cevian Capital AB has been shaking things up lately.

These dynamics make the offer valuation less scary than it first appears. The all-in cost at the mooted price would be about 4.2 billion francs, including assumed net debt, based on the last accounts. That’s about 16 times estimated Ebitda for 2018 — similar to DSV’s own valuation, despite the gulf in operating performance.

Panalpina is expected to make 237 million francs of operating profit in 2021. That already assumes some margin improvement. But suppose the purchaser can double it, and the return on invested capital would be an acceptable mid-teens percentage. That’s not an implausible outcome given DSV’s track record in M&A and the room for improvement at Panalpina. The uncomfortable truth is that this takeover is almost certainly predicated on large job losses, most likely outside Switzerland.

Can't Keep Up

DSV's approach for Panalpina follows prolonged underperformance of the target's shares

Source: Bloomberg

The snag for DSV is winning over the foundation, which will prefer to take shares rather than cash so it can stay invested. That explains the structure of the offer. The stock component is as large as it can be without requiring the approval of DSV shareholders, who could be an unhelpful obstacle if an auction developed. Switzerland’s Kuehne & Nagel International AG is the obvious interloper.

DSV’s current proposal, worth 170 Swiss francs a share when it was delivered to the board, is clearly below the suitor’s pain barrier. Hence the gain in DSV’s stock on Wednesday. Panalpina can demand more. The foundation will determine the outcome, and there’s no indication it will be driven by anything other than price. The freight company isn’t its only asset, and only a minority of the firm’s employees are based in Switzerland. Time to hold DSV’s feet to the fire.

source: https://www.bloomberg.com/opinion/articles/2019-01-16/denmark-s-dsv-can-afford-to-pay-up-for-logistics-rival-panalpina

Indian Govt unveils national air cargo policy

Chennai: The government has announced its national air cargo policy with which it aims to make India one of the top five air freight markets by 2025. Besides, the government, with implementation of the policy wants to create air transport shipment hubs at all major airports over the next six years.

The policy document released during the two-day Global Aviation Summit 2019, which kick started on Tuesday, stated that the policy will encourage code sharing/inter-line agreements between foreign and Indian carriers.

As per the policy, international cargo comprises 60 per cent of the total air cargo tonnes handled in the country, logging a growth of 15.6 per cent in the previous fiscal, while domestic cargo grew by over eight per cent, which reflects the skewed modal mix, in which roads account for over 60 per cent of cargo transportation as compared to the global average of around 30 per cent.

Indian express industry, one of the fastest growing markets globally, grew at a compounded annual growth rate of 17 per cent over the past five years and was estimated to be Rs 22,000 crore in 2016-17, it said. However, it has a small share of about two per cent of the global market, it added.

Stating that the domestic express industry will be worth Rs 17,000 crore, the policy document added that the international express is estimated to contribute Rs 5,000 crore to the Indian express industry.

As per the document, the potential in the new markets needs to be explored with long-term infrastructure creation in order to sustain cargo growth in the next 10-15 years at least.

It must be noted that the government issued a massive tax cut on ATF earlier this year which brought a litre of fuel for airlines lesser than a litre of petrol.

The cargo policy also seeks to establish agreements between national carriers/freighters and integrators to improve domestic connectivity as well as encourage the establishment of agreements between national and international carriers/freighters and other airline operators to provide access to key global cargo hubs. It also aims to promote the development of a last mile/first mile connectivity program at international/regional gateways, as per the document.

As part of the security strategy under the policy, the strategy will address security related to the physical cargo, people handling the cargo, data and information related to shipments within and across all chains of custody transfers, it added.

To increase process transparency while decreasing shipment delays, costs and dwell time, a fully automated paperless trade environment with minimum face-to-face interactions will be implemented, as per the policy document.

The policy covers all three categories of air cargo transport – domestic cargo to ensure efficient flow of goods across India; international cargo facilitating all indigenous export and import of goods; and transit international cargo by making India the transit cargo hub of choice to and from other parts of the globe.

The GST and other economic legislation to be reviewed by the appropriate government agencies to ensure effective measures are in place to support the national air cargo development strategies, among others, the policy document said.

Source: https://newstodaynet.com/index.php/2019/01/16/indian-govt-unveils-national-air-cargo-policy/