(Bloomberg Opinion) -- 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.
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.
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.
To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net
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Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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