The ME Surge in M&A
Larger logistics companies may soon be in a position to pounce on cash strapped competitors. Jason OConnell reports on the rise in mergers and acquisitions
The fragmented Middle East logistics sector could be about to witness a wave of consolidation as the economic downturn presents companies equipped to weather the storm with the opportunity to pick up assets at bargain prices, experts say. However market uncertainty brought about by current regional geopolitical and economic conditions may be holding jittery investors back from embarking on a shopping spree.
While regional M&A activity is yet to see a surge that could soon change if global activity is anything to go by. Global M&A deals in the transportation and logistics sector doubled in value in 2015 compared to the previous year thanks to a spike in megadeals valued at $1bn or more, according to a recent report by PwC. Last year closed with $172.7bn worth of announced deals versus the $87bn recorded in all of 2014, the report said.
2015 was the year of headline grabbing megadeals and the transportation and logistics industry was no exception as megadeal value increased more than two-fold compared to last year, said Jonathan Kletzel, U.S. transportation and logistics leader for PwC.
The United States was an especially attractive target for large-scale M&A with eight megadeals, totaling 41% of the overall megadeal value. This increase within the U.S. can be attributed to domestic companies struggling to grow organically and the unprecedentedly low finance rates, Kletzel adds.
As strategic investors in fragmented industries such as trucking and shipping continue to follow an inorganic path of attaining growth and scale, we expect consolidation to continue, leading to elevated deal values in the year ahead.
Transactions involving Asia and Oceania dominated deal activity in 2015, accounting for almost half of the global activity with 120 deals worth $96.2bn, PwC says. However a majority of the deals in this region involved China and were primarily driven by the decelerating Chinese economy as reduced growth projections caused overall softness in valuations and equity markets, leading to an increased number of attractive acquisition targets and industry exits.
North America ranked second with 61 deals worth $83.5bn, including two megadeals worth $34.7bn.
Local deals remained the preference of transportation dealmakers in 2015, representing 59 percent of all deal activity; however, the majority of deal value (51%) was driven by cross-border transactions. This is a major reversal from the previous year as cross-border deal value increased by more than three times to $114.9bn and deal volume increased by 31%. As large international players within the sector continue to expand their international operations and service offerings in efforts to develop global transportation networks, PwC expects continued interest in cross-border transactions.
The Middle East in focus
Could this level of M&A activity begin to trickle down to the Middle East logistics sector? One firm that has been very active on the acquisition trail recently is Dubai-based parcel delivery service Aramex, though the company has focused on expanding its footprint outside the region rather than in and around the Arabian Gulf.
In January, Aramex paid AED 9mn ($2.5mn) for a 25% stake in cross-border mailbox consolidation service provider WS One Investments, which operates out of Ohio, with a view to boosting its e-commerce business. It also added New Zealand-based courier service provider Fastway to its portfolio in January in a deal worth AED 293.6mn ($80mn). Fastway Couriers global network includes 63 regional depots and 1,500 courier franchisees across Australia, New Zealand, Ireland, Northern Ireland and South Africa, though the deal does not include Fastways business in Ireland or South Africa. The company transports 16 million parcels globally to 75,000 customers each year.
In 2014, Aramex acquired PostNet South Africa for $16.5mn and Australias Mail Call Couriers for $26m. The Middle East now accounts for half the companys business with 18% in Asia and 15% in Africa. Chief executive officer (CEO) Hussein Hachem says the company is eyeing two-to-three acquisitions this year and investments in up to five start-ups as part of plans to diversify its business into key markets in Africa and Asia.
DIFC-based Al Masah Capital says we have yet to see a major rise in M&A activity in the wider Middle East logistics sector, though that could change if a prolonged economic downturn puts sustained pressure on corporate earnings, enticing shareholders to slash their asking prices. The market announced 25 deals in 2015, up from 18 deals in 2014, though the values of those deals have not been disclosed to the public so it is difficult to judge precisely whether M&A activity has risen, remained flat or declined. Based solely on the number of deals, Q1 2016 is seeing similar activity as that witnessed in the same quarter a year earlier, Al Masah says.
Over the past year, there hasnt been any single company that dominated the M&A activity in the Middle East logistics space. The transactions remain dispersed across companies and countries. In 2015, the UAE had seven announced transactions followed by Saudi Arabia (6), Kuwait (5) and Egypt (4). However Al Masah says the Middle East logistics sector in general is very fragmented in nature with a lot of small players who are likely to consolidate with time to operate more efficiently. This will drive the number of M&A transactions within this sector over the next few years.
The freight trucking industry was the most active subsector in 2015 representing 32% of the entire Middle East logistics M&A market compared with 22% a year earlier, Al Masah says. The number of deals within that subsector are double those of last years. Investors were eying freight trucking businesses as they held the greatest potential in this industry. This subsector is at the heart of the economy acting as the connector between all major industries and services and serves as the bloodstream of the regional countries.
Improved regional economies demand larger quantities of goods and with the absence of railways in the region, freight trucking provides the ultimate exposure to inter-regional connections. In addition, the reduction in global oil prices have helped transport companies move goods at cheaper costs than few years back.
A good time to buy?
Generally speaking, businesses operating in cyclical industries are best acquired during a slowdown, says Al Masah, because that is when their profitability is hovering around its lowest levels in the economic cycle. Profitability that is reduced by pure economic cycle offers price bargains for investors who have a long-term payoff horizon and are able to withstand the natural short-term slowdown of business.
We are starting to witness a slowdown in the activity of a lot of logistics companies in the UAE as a result of a global decline in trade activity, Al Masah says. However, we have not yet seen a huge decline in the prices requested by the selling shareholders. As time passes and trade slows down further, the expectations of the selling shareholders are bound to go down. Only when the price in relation to the value of the targeted company is significantly low to justify a purchase will it be a good time for companies to expand through acquisitions.
Market uncertainty brought about by current regional geopolitics and economic conditions are among factors constraining regional M&A activity, though that could change quickly, says Nadim Kayyali, head of corporate and commercial ME, at law firm Eversheds.
There is no doubt that that the current increased military spending, combined with the lower oil revenues and general wait and see attitude of many investors has had a significant impact on the overall business and investment environment, says Kayyali. Foreign investors are reluctant to deploy in a turbulent market, public spending on infrastructure and other key sectors has dropped and private investors are generally jittery or prefer to wait and see when things bottom out or otherwise diversify their investments by deploying their investments outside the region.
I am very much aware that logistics providers are investing and expanding in the region but I have yet to see substantial M&A activity in that space. However the opportunities are there and this could change very quickly. For strategic investors there is no doubt that valuations have dropped and they would be able to acquire valuable assets at good prices. Moreover, consolidation to achieve synergies and efficiencies in difficult market conditions will also drive M&A activity moving forward.
Abdulaziz Al-Sahlawi, director of PR at Gulf Warehousing Company (GWC), agrees that economic factors, while causing a stasis in M&A activity for the time being, may soon make some struggling companies vulnerable to takeover by larger competitors. This, he says, is bound to benefit the logistics sector in the long run.
Mergers and acquisitions have decreased recently, as performance in the market has decreased due to the surrounding economic factors, he says. However, this may change over the coming period, where we might see some companies become no longer capable of maintaining their operations, which would make them prime for strategic acquisitions that would seek to overtake their operations and offer better management. This will ultimately be a boost to the sector, as it will increase the synergy of all parties involved in the acquisition.