Opinion: Mark Birri

The logistics sector is littered with upbeat earnings announcements, transactions and talk of investment. Encouragingly given the fragile state of confidence in the UK, these have not only come from large multinationals with exposure to fast-growing Asian markets, but also UK companies that are constantly reinventing the way in which they operate to accommodate the changing needs of their customers.

UPS, the global express logistics company, for example expects to deliver more than 120 million packages worldwide in the last week before Christmas alone - up more than 6% compared to the 113 million delivered during last year's peak week. This reflects the continuing increase in demand for online shopping and ‘last minute’ orders needing to be met.

CEVA logistics, the contract logistics and freight management group, announced a 17% year-on-year increase in third quarter EBITDA (cash-like earnings) to €238 million. According to CEO John Pattullo, this was a result of targeted cost reductions and an improvement in operational efficiency which has more than offset the impact of the challenging market conditions.

CitySprint, the UK’s leading same day distribution network, has completed the back-to-back acquisitions of Lewis Day’s courier operations and Medical Services Limited. The acquisitions will enhance CitySprint’s network density and strengthen its already well-rooted presence in the high growth healthcare sector. Having acquired five businesses in the past year alone, CitySprint is on track to deliver £100 million of revenues in 2012 – more than double its 2007 figure.

The changing way in which we buy our consumer goods and pharmaceuticals, the demand for live tracking, and the increasing trend towards just-in-time ordering is revolutionising the world of logistics. This represents a significant threat to some companies, and an equally significant opportunity for those embracing change.

By constantly challenging their own processes and investing in the right acquisitions, businesses can position themselves to exploit these market opportunities. This will pay dividends in the form of increased market share (volume), and the margin benefits of operating a denser network with higher volume throughput.

With governments across Europe and the US continuing to struggle with mounting debt, uncertainty appears to be hanging over the markets. What impact is this having on companies exposed to commodities, and what in my opinion are they doing to fight back?

According to Index Mundi, in the past six months commodity prices have deteriorated by circa 10% across the board. Company valuations have suffered further still. Share prices of Industrial mammoths such as Glencore (world’s biggest commodity trader), Rio Tinto (diversified miner), and Sims Metal Management (world’s largest metal recycler) all declined by c.30% over the same period.

Against this rather gloomy backdrop, one might perhaps expect boardrooms to react with a kneejerk cut on investment. Instead, there is strong evidence that companies are looking to strengthen their position by pursuing acquisitions and joint ventures.

For example, only last week Sims Metal Management, one of the biggest victims of shareholder sell-offs, acquired the assets of US based Promet Marine Services, the waterside metal engineering business. This will give Sims access to a rail serviced pier and two deep water berths which will act as its main regional export terminal.

TransAtlantic, the Swedish Industrial shipping company, conducted a 60 million Euro rights issue to fund the acquisition of Aberdeen based SBS Marine, an offshore transportation company. TransAtlantic cited that the acquisition will increase service offering and strengthen its presence in an energy commodities market that is expected to grow by 35% by 2035.

In Brazil Companhia Docas do Para (CDP), a state port authority, is planning to tender the 25-50 year concession of eight terminals by 2012. CDP have certainly not been short of takers with commodity firms, international logistics companies and diversified shipping carriers all putting themselves forward for a slice of the action. These have included companies such as local miner Vale, aluminium producer Norsk Hydro, Louis Dreyfus Commodities and freight forwarder Center Cargo to name but a few.

Finally, the list of industrial and commodity players publicly stating their interest in pursuing acquisitions keeps growing. This includes leading names such as Alu-Met, Schmolz+Bickenbach and Lundin Mining.

In the midst of uncertainty surrounding the financial sector, it is clear that many companies are intent on strengthening their competitive positioning. This is particularly true for commodity players who are amongst those worst hit.

Intensifying global competition means that falling behind on capital investments no longer remains a viable option.

Further to my posting last month, there are further optimistic signs in the logistics industry as the general mood improves on the back of foreign investment and an upturn in global trade.

The UK's position as a strategic hub has seen a significant change in the look of the industry in recent years. In 2006, the UK’s largest 50 logistics firms represented 51% of combined sector turnover however by 2010 UK firms represented just 31% of total sector turnover. Interestingly M&A in the sector during this period has fallen from £875 million to £293 million with the bulk coming from foreign investors. This coupled with the need to cut costs in the downturn has also led to marked improvements in industry efficiency.

A recent deal highlighting some of these factors was the acquisition of TDG by Norbert Dentressangle (ND), leading to the creation of Europe’s largest transport fleet. By combining these entities with Christian Salvesen they have maximised their economies of scale. The ability to hedge foreign exchange and commodity prices has minimised cost fluctuations. This has given them an advantage over their rivals by not having to pass these costs along to their customers or accept them and operate on reduced margins.

For me this deal represents an interesting precedent for M&A and for the sector in general. Recent figures released by the Freight Transport Association (FTA) point to the fact that there is a potential opportunity for firms to gain market share going forward. The FTA reported that 50 firms in the logistics sector became insolvent in 2008 and 2009. The race to dominate the shifting nature of the market is underway with ND holding a very strong hand at present.

The onus is on the rest of the industry to throw their hat into the ring and consolidate the mid market.

With corporate balance sheets now largely ‘repaired’ thanks in part to non-core asset sales, trade acquisitions are firmly back on the agenda. Corporate buyers can now focus on targeting acquisitions to deliver shareholder value through the time-honoured means of synergistic benefits and absolute growth.

And in the logistics market I am seeing a lot of evidence of M&A appetite across most subsectors right now.

In the express delivery market, CitySprint (where I helped deliver a deal last year) has continued on its acquisition warpath with the completion of its third acquisition this year. Despatch UK, the latest in a string of ‘bolt ons’, will benefit from CitySprint’s enhanced technological offering and extended network delivering real world benefits to its customers.

Odyssey Logistics, the diversified multimodal logistics services, technology and consulting company, have also completed 4 acquisitions in the past 14 months. These include Chemical Marketing Concepts, the outsourced sample fulfilment player, and Optimodal, the US’s largest intermodal chemical logistics player.

Financial buyers have also resurfaced and are, once again, looking to put their capital to good use. A good example of this is Exponent’s £145 million investment in Pattonair, the supply chain outsourcing giant of the aerospace industry, acquired from Umeco plc.

With corporate and individuals looking for faster, more efficient logistics services, I feel that a string of important logistics transactions may well be on the cards for this year and next.

In recent months a number of national and international express parcel carriers have hit the headlines with potential M&A activity in the offing.

With TNT having announced that TNT Express (its express parcel division) will be listed and operated independently, speculators have been quick to indentify the Dutch express carrier as a potential takeover target.

Closer to home, as part of its ongoing bailout discussions, Royal Mail is coming under increasing pressure to sell off some of its more profitable divisions including its parcel business, General Logistics Systems. Interestingly, TNT Express has been identified as a potential acquirer for GLS.

Another story which emerged earlier this year was that of the underperforming express parcel carrier, CityLink, which was acquired by Rentokil Initial in 2006. Following the departure of CityLink’s management team and a £95m goodwill write off by its parent company, Rentokil CEO Alan Brown has personally assumed control in a bid to address CityLink's operational inefficiencies by the end of 2011. He has also mentioned that he would consider a sale of the struggling courier but fears that buyers may be thin on the ground in what he sees as a challenging market.

So what does this all mean?

The digitalisation of documents and the introduction of social media networks represent a formidable challenge to the express logistics market. On the other hand, internet shopping, track & trace and outsourcing trends in the wider logistics sector have presented ‘first movers’ in the industry with a once-in-a-generation opportunity to evolve and grow their market share.

As my recent work on the CitySprint deal we recently completed proved, firms which are able to adapt to the changing market landscape will thrive and continue to gain market share both organically and through opportunistic acquisitions.

Following the slump in metal prices noticed across the board in the second half of 2008, many metal processing and recycling businesses were left holding large stockpiles of product. Many were forced to swallow huge write-offs and saw demand plummet as the industrial export markets shut their doors.

Fast forward two years and the metals market is enjoying a surge in investment in both the ferrous and non-ferrous sectors supported by the sustained increase in product prices.

Norsk Hydro, the Norwegian aluminium player, has made a $5 billion offer for Vale’s aluminium assets. Rusal, the world’s biggest aluminium player, has acquired 33% of Norinco, the South-East Asian aluminium player. For a consolidated sector like aluminium, seeing the ‘mammoths’ fighting to secure mining rights and access to the Far East is a good indication of positive boardroom sentiment.

What is even more interesting is the movement in downstream markets.

Klockner, the international steel distribution group, has issued a €186m convertible bond to fund growth. And Gisbert Ruhl, Klockner’s CEO, has been explicit in his aim to quadruple Klockner’s sales by 2020.

In the UK, Klockner already owns ASD Metal Services, the multi-metal stockholder, so I wouldn’t be surprised if the UK’s numerous quality metal stockholders and processors get a knock on the door from Mr Ruhl in the coming year. I would also be surprised if the likes of Stemcor don’t try to beat him to it.

I believe we could see a fair number of transactions in 2011 in the UK stockholding and metals recycling sectors. And as always, top prices will be paid for those who have prepared themselves internally to ensure they get value for their businesses.

Things continue to motor ahead for UK based engineering specialist Weir Group.

Not content with being the FTSE 100’s best performing stock (in so far as it has risen 120 per cent over the last 12 months), recently reported results show an exceptional rise in orders for its oil and gas business during the last quarter.

Weir also continues to expand overseas, most recently with an acquisition in India, a market where it has enormous opportunity over coming years.

Most UK engineering stocks appear to have weathered the recession well, indeed judging by the number of bid approaches some are weathering it too well! Weir is one of the leaders in this recovery, and I’ll be surprised if we don’t hear more about its M&A strategy over coming months.

Three quarters of British consumers would seriously consider buying an electric car, according to recent research in the Financial Times. More importantly, the principal attraction for doing so is the lower running costs associated with battery power.

In my last blog I argued that for electric cars to ‘take off’ they would need to be cheap, safe, convenient, reliable and genuinely green. Based on the FT’s survey, it would seem that these points appear to be in the right order.

JD Power has forecast that by 2020, 6 million electric vehicles will be sold per annum. Moreover, Ernst & Young has stated that by 2013 there will be at least 18 new battery powered vehicles in production – most of which will be the result of multi-billion pound investments by the global OEMs as opposed to the ‘shed creations’ of hobbyists.

So it seems like electric vehicles will soon become a real option for the ‘average Joe’.

In my previous blogs I have focused mainly on new vehicle technology and the opportunities this is likely to create for the automotive industry. However, with electric vehicles expected to constitute c.5% of new vehicle sales in the next 5 years, new infrastructure and refueling (read ‘recharging’) systems will also be needed to accommodate this new market.

In addition to recharging, the way we purchase, drive and service cars are is likely to change dramatically with the introduction of electric cars. This all translates into new opportunities for the smaller, more creative companies which characterise of the UK automotive industry.

And as always, the OEMs, large automotive suppliers, large retail groups and automotive service centres will be looking to acquire new technologies and back the front runners in this evolving market landscape.

These days, going green is all the rage. Hybrid cars like the Toyota Prius and Honda Insight litter the streets of Hollywood, and more and more common folk are jumping on the bandwagon.

However, you have to wonder what proportion of the Hollywood crowd are genuinely committed to environmental change, and how many just like to be seen with 'politically correct transport accessories' - a term coined by a leading environmental website.

Whilst I’m sure that the average motorist is increasingly environmentally conscious, it is fair to say that the ‘chic crowd’ probably account for a good proportion of green car sales. The evidence for this lies in the fact that supercars and 4x4s tend to be the cars which most often suffer a green makeover in the form of a shiny new battery pack. Moreover, it is widely accepted that most diesel hatchbacks will return more miles per gallon than their existing hybrid counterparts.

So when will the automotive industry enjoy a genuine green revolution?

In my opinion, for green cars to become a mass market phenomenon they will need to be cheap, safe, convenient, reliable and genuinely green.

Cue the Chevrolet Volt. GM claims that its new Volt will run entirely on batteries for 40 miles before switching to a traditional petrol engine. It will take a mere 4 hours to recharge and it comes with an 8 year, 100,000 mile warranty. So given that prices should start at below US$30,000, it sounds like it could tick all the boxes.

Whether the Volt represents the start of a genuine green revolution remains to be seen. What is certain is that OEMs’ ability to move quickly and invest in the right technology will be a key factor in protecting and growing market share further down the line.

I will finish with a point I’ve touched on before – middle market companies with innovative technology will increasingly be in the OEMs’ sights.

Carlos Ghosn, the CEO of Renault and Nissan, recently announced that he expects global car production to hit 70 million units by the end of 2010. This represents an increase of over 20% from the 57 million units produced in 2009.

Growth rates such as these in a market as large and as mature as the automotive market might seem a little optimistic. However, once you consider that this growth will largely be driven by the world’s most populated and fastest growing economies (which still have relatively low car ownership rates), Ghosn’s predictions begin to look more reasonable. Indeed, even more bearish estimates from independent industry analysts are forecasting 14% year-on-year growth to 65 million units.

So what is happening in these high growth markets?

As the world’s biggest car market with an estimated 10 million unit sales in 2010, all eyes are once again on China. Here, the Chinese authorities are providing financing for electric vehicle charging points across five major cities. Furthermore, they have announced consumer incentives of £6,000 for electric vehicles.

In addition to promoting alternatives to fossil fuel based motoring, China is also showing signs of modernisation in industrial relations. At Honda’s components factory in Foshan, 1,800 employees are striking in protest of a 24% pay rise offer which would take them from £153 to £190 per month - the workers are holding out for £250. This may be some way from the wages of their European and US counterparts, although the fact that the government has not stepped in, and that Chinese workers’ aspirations are rising fast are irrefutable signs of change.

What does this mean for industrial companies in the UK?

Firstly, it appears that development of alternatives to fossil fuel engines is now looking less like a dubious long term bet, and more like a fundamental component of all large OEMs’ strategies. Hence, acquisitions of innovative industrial companies, a large number of which operate in the UK middle market, could become more prevalent.

Moreover, with Chinese labour costs showing signs of catch up, in the near future investors may no longer regard investment in Chinese production facilities (at the expense of UK and Europe) as a 'no brainer'.

With economic recovery at the forefront of people’s minds, given the mixed messages on medium term prospects for the economy, it is difficult to tell where we are heading in respect of M&A within the engineering & industrials sectors.

So what can the facts of recent investment activity tell us?

A good indicator of market expectations is the IPO market, principally driven by investor confidence and availability of funds. Following the ‘deep freeze’ experienced during the recession, IPOs look set to resurface. Natural resource and energy companies are leading the way with Rusal, the Russian aluminium player, having raised $2.24bn in Hong Kong in January for example. More recently a number of ‘downstream’ industrial players have also been touted as IPO candidates. These have included NXP, the KKR-backed electronics company, Bilfinger Berger’s Australian construction business, Pilatus, the Swiss aircraft manufacturer, and Dutch industrial group Stork’s aerospace and technical services divisions.

Further optimism can be drawn from the UK manufacturing output figures released in February which showed an encouraging 1.3% increase versus the 1% fall experienced in January.

Finally, April has seen a large number of major industrial players formally announcing their return to the M&A market as buyers, as opposed to the distressed, non-core disposal plays we’ve become accustomed to. Bosch and Magna, two automotive giants, have both stated their intention to put their acquisition warchests to good use. Aalberts Industries and Ningbo Huaxiang, the Dutch and Chinese industrial component players, have also expressed an interest in pursuing complimentary acquisitions.

Overall, it would appear that the investment community has a positive view of where the economy is heading, particularly in the industrial sector.

And what does this all mean for the M&A market?

With IPOs once again providing private equity with an exit route, and with growing acquisition interest amongst trade players, we could soon see a return to financial and trade buyers competing for assets. This, in turn, should push up valuations and transaction activity, and so overall I'm pretty positive about the opportunities ahead over coming months.

With the global economy now tip-toeing its way out of recession, the world's major automotive players are looking to position themselves for the decade ahead.

With China having surpassed the United States as the world’s biggest automotive market in 2009, it is unsurprising therefore that many are looking to the Far East for growth.

In the past few months, a number of automotive companies have announced their intention to target the Far East through acquisition. Polaris, the US based recreational vehicle manufacturer, has expressed an interest in acquiring a Chinese manufacturing presence to target local demand, as has Titan, the European commercial wheel and tyre producer.

Large players with existing Chinese presence are also looking to grow their footprint. Volkswagen recently announced plans to build its fifth plant in China, and Continental are targeting Chinese producers with a view accessing local demand.

As our recent conversations with automotive suppliers in the UK have shown, there is still plenty of life left in the market here. The question now is, will M&A form a part of the plans of global players intent on entering the Asian market, and if so will the highly intellectual property rich UK market form part of their development strategy?