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The logic of logistics

by Eric Vermilya  |  Published November 30, 2012 at 3:35 PM
"We love logistics," UPS Inc. proclaims, and for good reason. Logistics aren't just brown trucks delivering cardboard boxes full of stuff to your front door. The transport, warehousing and supply-chain management of goods worldwide represents an $8 trillion economic activity. In the U.S. alone, logistics totaled nearly $1.3 trillion last year, according to industry estimates compiled by Armstrong & Associates Inc., a consultancy based in Stoughton, Wis.

"It is a field that touches everything," says Jeff Zanarini, a managing partner at private equity firm H.I.G. Capital LLC.

Given these numbers, it's understandable that UPS-like ardor is widespread. Private equity is bedazzled. Wall Street is taking notice. Hundreds of companies are building, marshaling forces and producing a drumbeat of deal activity. "There are so many players. It is just ripe for consolidation," explains Jeffrey Unger, chairman and CEO of investment bank G2 Capital Advisors, based in Cambridge, Mass. "This makes for a tremendous opportunity to create acquisitions."

The outsourcing of logistics-related activities to management specialists, called third-party logistics providers, is an especially bright constellation in this universe. Third-party logistics concerns, or 3PL, don't own the trucks, ships, railroads, aircraft or warehouses themselves. (The fact that they are asset-less or asset-light is a major boost to financial performance, since depreciation is minimal or nonexistent.) Rather they contract the services of others -- they may depend on several shipping lines, dozens of trucking companies and hundreds of warehouses -- and manage the flow on behalf of their customers, who own the goods being moved. They act, in effect, as middlemen, but ones with particular expertise.

The 3PL market eclipsed $133 billion in the U.S. in 2011. But it has penetrated only 10% of potential business, Armstrong estimates, as manufacturers and distributors are only now outsourcing their supply-chain management. "In many ways, the industry is still in its infancy," says Jason Bass, a managing director in Harris Williams & Co.'s transportation and logistics group.

IBM Corp., for example, was considered a pioneer when it sold its internal logistics operations for $423 million to Geodis, the logistics division of the French railway SNCF. That was less than four years ago.

Logistics "used to be all about [a company's own] staff getting pallets on the dock," says Zanarini, whose firm acquired two third-party logistics providers in 2011. "Ultimately," he added, "most companies will move to an outsourced model."

According to Armstrong, the top 10 3PL companies account for about 22% of all global activity, a list that includes subsidiaries of UPS and the German DHL. However, the industry remains highly fragmented, both geographically and by industry. The U.S. alone boasts more than 3,000 third-party logistics companies.

"They're everywhere," says Unger. "In every city in America, there are dozens of them, [specializing in] every product, every sector."

This combination of growth and fragmentation primes transaction flow.

"There's a very active M&A market," says Mark Fornasiero, managing partner of the Clarendon Group, a transportation and logistics-related advisory firm. Fornasiero has tallied more than 30 deals so far this year in the U.S. alone.

Most of these transactions are decidedly mid-market. One of the latest came on Oct. 25 when XPO Logistics, publicly traded and based in Greenwich, Conn., acquired Turbo Logistics Inc. for $50 million. Turbo Logistics marked XPO's third acquisition this year.

Fornasiero and others cite as particularly noteworthy Eden Prairie, Minn.-based C.H. Robinson Worldwide Inc., the biggest U.S.-based third-party logistics concern and the fifth-largest globally. Robinson made two acquisitions in September. First, it bought Warsaw-based freight forwarder Apreo Logistics S.A. for an undisclosed price. Then, in late September, Robinson announced it would acquire a smaller domestic competitor, Phoenix International Freight Services Ltd., for $635 million. That marked the largest 3PL buyout in four years. The purchase price equaled 12.5 times Ebitda, a particularly rich multiple that has some industry insiders shaking their heads.

Phoenix International "was going to IPO," says Richard Armstrong, chairman of the consultancy that bears his name. "This was such a good offer, they took the IPO right off the table."

A spokesman for Robinson declined to comment further on the acquisition.

The deal links the suburban Minneapolis-based Robinson with Phoenix International, located near Chicago, a seven-hour drive down Interstate 94. But common Midwestern roots don't explain the appeal of Phoenix International to Robinson. The two companies operate in vastly differently geographic spheres. Robinson excels in domestic logistics; by some measure the company is America's biggest brokerage. By contrast, Phoenix International deftly juggles international freight forwarding. It is one of the top six Asia-to-U.S. freight forwarders, says Richard Armstrong.

Before the Phoenix International deal, Robinson moved some goods globally, but was a relatively small player. The acquisition "is a big step up into the international arena," noted Richard Armstrong.

That kind of coupling exemplifies what veteran investment banker Alexsander Stewart, a managing director with Stifel Nicolaus Weisel's transportation and logistics team, called the demand for "origin-to-destination capabilities."

So, for example, one third-party logistics provider can insure that garments manufactured in Baoding, China, can be moved by truck or rail to Tianjin, loaded on container ships to Los Angeles, transferred and trucked to warehouses in Indiana, then further disbursed throughout the United States, all in the shortest, most efficient and cost-effective way possible.

Geographic expansion doesn't have to be global in scope and can be directed at specific regions. For example, the Philadelphia-based company Leading Edge Logistics has acquired this year for undisclosed sums two companies -- C&F Logistics and Horizon International Shipping. Both focus on the Caribbean, especially Puerto Rico, and bolster what Leading Edge Logistics considers its Caribbean-oriented strength.

Geography represents only one way in which logistics companies are consolidating. Industry specialization is another. There are third-party logistics companies operating in every imaginable industrial niche, nook and cranny, says analysts. Logistics providers with industry expertise wish to acquire either complementary offerings or competitors.

Deals follow. Richmond, Va.-based Owens & Minor Inc., for example, in July acquired Celesio AG, based in Stuttgart, Germany, for €130 million ($166 million). Both focus on healthcare and medical devices logistics, a highly specialized and demanding activity, but one with a loyal clientele, a steep barrier to entry and margins much higher than those servicing many other industries.

"You can buy them, walk through the door and make money," says Richard Armstrong.

Then there's logistics-related function. In 2011, the world's largest 3PL, DHL Supply Chain, acquired an Italian company, Eurodifarm, which focuses on temperature-controlled logistics, especially applicable to pharmaceuticals. This year, Kuehne + Nagel Management AG, the second-largest 3PL in the world, bought an Australian operation, Link Logistics International Pty. Ltd., which specializes in food-related freight forwarding, so-called perishable logistics.

Some third-party logistics players specialize in reverse logistics, the return and replacement of damaged or rejected goods from customers to manufacturers. Others specialize in so-called "last-mile delivery" to consumers, which may also include the installation of large appliances or the assembly of furniture.

The bulking up of these specialist operations continue. Toll Global Forwarding is illustrative of an acquisitive global player. The subsidiary of Australia's Toll Holdings Ltd. has acquired eight companies since Toll International and Patrick International Freight merged to form the group in 2006 and now ranks 14th among global 3PL providers.

In 2010, Toll Global Forwarding acquired Summit Logistics International for an estimated $70 million, or an Ebitda multiple of 9.3 times. The acquisition gave Toll Global Forwarding a beachhead in the U.S. and expertise in China-to-U.S. trade. In addition, Toll gained the expertise of a particular Summit subsidiary, FMI International LLC, which specializes in a type of logistics called "garments on hanger" that moves exactly what the name implies. Toll now fashions itself a specialist in this field and is looking to bolster that expertise with further acquisitions.

"They're out there looking for targets in Asia, Europe and America," says one industry watcher.

Strategic deals now account for the majority of logistics-related transactions, by a margin of three to one, according to one estimate. That's a reversal of the boom years when private equity consistently outgunned strategic competitors. During that time, multiples and purchase prices skyrocketed.

In August 2007, Apollo Management LP, in a hotly contested battle, bought EGL Inc. for $2.2 billion and folded the Houston-based company into the PE firm's Ceva Logistic Ltd. platform. The purchase price represented a dizzying 14.5 times multiple. It marked the most-expensive ever logistics-related deal that didn't involve an asset-heavy transportation concern. (That prize went to Berkshire Hathaway Inc., which paid a total of $34 billion for Burlington Northern Santa Fe Corp. railroad.)

Ceva now ranks sixth in third-party logistics, with revenue last year of some $9.1 billion. However, with a crushing debt burden, Ceva has barely kept its financial head above water. For the six months ended June 30, 2012, finance charges alone totaled $335 million. Ceva lost $303 million on revenue of $4.6 billion. Ebitda totaled a paltry $175 million.

Despite weak financials, in late August Ceva filed a preliminary prospectus to go public in the U.S. This follows a February refinancing that the company claims reduces interest charges.

There's no evidence private equity wants a return to the kind of megadeal that coursed through the industry in the period before the financial crisis. That doesn't mean PE firms are inactive, however. "Logistics have become one of the most talked-about discussions with our private equity clients over the past several years, more so than any industry that we play in," says Unger.

While they continue to grouse about multiples, which have historically hovered around 6 to 8 times Ebitda but are now once more reaching double digits, buyout firms remain in the chase. "If you're private equity, it's a good place to have your capital deployed," says Bass.

The biggest indicator came in June, when Platinum Equity bought a 65% stake in Caterpillar Logistics Services, a deal that valued the company at $750 million.

More typical is H.I.G. Last year, H.I.G. acquired two third-party logistics concerns -- Progressive Logistics Services LLC and LMS Intellibound Inc. -- and combined them into a new platform company called Capstone Logistics LLC.

"We definitely have our eye on more," says Zanarini, who added that his firm isn't deterred by strategic competition. "We have selected industry verticals where we have the knowledge, the capabilities to go toe-to-toe with strategics."

Ask private equity firms or their advisers why they like third-party logistics and you'll get a laundry list of adjectives: large, fast-growing, fragmented, recession-resistant, asset-light. Add to that ample opportunity for exits. Strategics are on the prowl as are bigger private equity firms wanting to add bolt-ons to platform companies.

Take the case of the XPO-Turbo Logistics merger, where private equity was on both sides of the deal. Turbo Logistics was a subsidiary of Ozburn-Hessey Logistics LLC, owned by private equity firm Welsh, Carson, Anderson & Stowe. Jacobs Private Equity LLC owns a stake in XPO.

Those following the industry believe that cross-border deals will also accelerate. "There is a group of Asian and European investors on the hunt for a whole bunch of companies that they think they can string together to provide," in Stewart's words, "that perfect move every time."

That's the quest. Logistics have gained in complexity, while the pressures for better performance have, if anything, continued to increase. "The globalization of the supply chain is one element that has made the industry blossom as much as it has," says Fornasiero.

Stewart cites a retailer like Wal-Mart Stores Inc., which demands goods be delivered within a specific 48-hour window or the manufacturer gets dinged with penalties. Most manufacturers don't have those kinds of capabilities, so they must rely on third-party logistics providers, he says. And that's why UPS isn't the only company that loves logistics.

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Tags: 3PL | Alexsander Stewart | Apollo Management LP | Apreo Logistics S.A. | Armstrong & Associates Inc. | Berkshire Hathaway Inc. | Burlington Northern Santa Fe Corp. | C&F Logistics | C.H. Robinson Worldwide Inc. | Caterpillar Logistics Services | Celesio AG | Ceva Logistic Ltd. | DHL | DHL Supply Chain | Eurodifarm | FMI International LLC | Geodis | Harris Williams & Co. | Horizon International Shipping | IBM Corp. | IPO | Jacobs Private Equity LLC | Jason Bass | Kuehne + Nagel Management AG | Leading Edge Logistics | LMS Intellibound Inc. | logistics | Owens & Minor Inc. | Patrick International Freight | Phoenix International Freight Services Ltd. | Platinum Equity | Progressive Logistics Services LLC | SNCF | Stifel Nicolaus Weisel | third-party logistics concerns | Toll Global Forwarding | Toll Holdings Ltd. | Turbo Logistics Inc. | UPS Inc. | Wal-Mart Stores Inc. | Welsh Carson Anderson & Stowe | XPO Logistics

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Eric Vermilya

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