Investors look to logistics, transport

In 2008, the Transportation and Logistics (T&L) sector in the Brazil, Russia, India and China (BRIC) and Middle East and African (MEA) markets is witnessing significant private investments. The sector is likely to experience much higher capital infusion in freight management companies and capacity during the second half of the year, according to independent market analyst Datamonitor's latest research. The analysis, Transportation and Logistics Financial Deals Insights, predicts the cost savings rationale for M&A deals, particularly by strategic investors, can only increase in the remainder of 2008; albeit with lower valuation multiples compared to those in 2007.

Financial market trends during 2007, including the tightening of credit and the weakening of the US Dollar, bolstered the relative deal-making positions of strategic and foreign investors in the first quarter of 2008. As of June 2008, there are concerns that the US economy is heading into or is in a recession, says Datamonitor automotive & logistics lead analyst and report author Praveen Ojha.

“This will only increase the number of players in the transportation business up for sale as a potential contraction in economic output will negatively impact demand for transportation & logistics products and services, as well as shippers' profits during the rest of 2008,” he says.

Shipping and aviation dominate the transportation and logistics deal activity in Q1 2008

Several themes emerge when examining deals announced during the first quarter of 2008. First, interest in western European targets has been high. Second, consolidation of the transportation & logistics sector within China has been a primary driver of BRIC deal volume. Third, deals for shipping and aviation targets have contributed significantly to overall deal value in Q1 2008, as was the case in the second half of 2007. Finally; the tightening of credit markets during 2007 did negatively impact the number of financial deals during the quarter, but the total M&A investment values actually shot up, Ojha says. “Driven by volatility in capital markets, public offerings and private placements both declined in value and volume terms in Q1 2008.

“Valuation in the T&L sector remained low due to the slowdown in economic activity and high oil prices globally. Overall, increasing scale and adding capabilities remained the key drivers for T&L Financial deals in the first quarter,” he says.

In Q1 2008, M&A activity in the T&L sector was driven by consolidation in the marine transportation segment, particularly focused on the container shipping and dry bulk segments. Private equity and strategic investments in the marine infrastructure segment remained high, supported by increasing demand for marine transportation.

The muscle power of Middle-Eastern petro-dollars

The financial strength of middle-eastern petro-dollars was clearly visible in Q1 2008, with Dubai Drydocks acquiring Singapore based Labroy Marine for $1.1bn. “Its parent, Dubai World, has long been on a global shopping spree”, Ojha says, “snapping up huge stakes in ports, airlines, office buildings and casinos, mostly in the developed world.”

The acquisition is Dubai Drydocks' second in Singapore after its successful bid of $424 million for a 70% stake in shipyard operator Pan-United Marine. The firm has since lifted its stake in Pan-United above 90% and taken it private.

Demand for rigs and vessels required to drill offshore oilfields has increased in recent years thanks to soaring crude oil prices, which have already hit a record of over $130 per barrel in April this year.

Bulk and container shipping attracting the large-ticket deals

Despite the fact that bulk-shipping rates have slumped almost 50% from a record in November 2007, amid delays in annual price talks between Chinese steelmakers and iron-ore producers and concern that the U.S. and Chinese economies are slowing, the wave of consolidation has continued into 2008.

Bermuda-based Excel Maritime Carriers, owner and operator of dry bulk carriers and a provider of seaborne transportation services for dry bulk cargo acquired its larger rival, Greece-based Quintana Maritime, a provider of dry bulk marine transportation services, for approximately $2.4bn. The purchase will make the combined entity the fourth-largest Panamax-size carrier company in the world. Quintana specialises in long-term charters while Excel has booked more on the spot market with short-term contracts, Ojha says.

“The purchase could trigger other acquisitions within the industry and one can foresee continued consolidation as public companies continue to buy private assets. Dry-bulk companies have benefited by strong commodity demand from China and India, among other countries,” he says.

In another major transaction in Q1 2008, US-based Marathon Acquisition, a blank check company, agreed to acquire for USD 1bn a 66% stake in Global Ship Lease, a subsidiary of CMA CGM S.A. of France, the world's largest container shipping company.

Marathon's upfront cash payment will enable Global Ship Lease to expand its fleet, and the cash proceeds from warrant exercises are expected to provide built-in financing for future fleet growth, Ojha says. “This transaction will leave Marathon well-positioned to capitalise on growth in global trade and positive trends in the container shipping industry.”

Global Ship Lease's contracted revenues and relatively fixed expenses, and lack of dependence on the U.S. economy will provide Marathon with an attractive opportunity to exploit the global container shipping demand.

The container shipping industry is the fastest growing sector of international shipping, showing an average annual volume increase of more than 10% per year since the early 1990s. Going forward, as a result of growing world trade, increasing global sourcing and manufacturing and continuing penetration of the general cargo market, the industry is estimated to maintain a 10-11% growth rate till 2012.

In one of the key deals of 2008, which highlights the attractiveness of the sector, CapMan, an alternative asset manager in the Nordic countries, acquired a 65% stake in Norway-based Cargo Partner Group, a company formed through the merger of T&L services providers Globex, Cargo Partner, and STS.

GE Transportation Finance, a provider of finance to the international T&L sectors, agreed to acquire a 32% stake in Hammonia Reederei, a Germany-based operator of container carriers and dry bulk ships. The investment in Hammonia would give GE Transportation Finance exposure to the fast-growing container-shipping segment.

Looking forward: Increased private participation in developing markets

Compared to H2 2007, with financial deals in other parts of the world drying up in Q1 2008 because of the credit crunch, the BRIC and MEA markets are witnessing the introduction of significant private investments. These developing markets are likely to experience much higher investments in freight management companies and capacity during the rest of 2008, Ojha says.

“Driven by the strong outbound demand for sea freight and air freight services from the Asia-Pacific, parts of Latin America and the MEA region, private equity funds and firms are turning their attention to both mid-size carriers (in shipping and aviation) as well as participation in port infrastructure development.

“After several strong growth years in bulk and containerised shipping, substantial war chests have been developed for mergers and acquisitions and this will only strengthen the consolidation wave in the remainder of 2008,” Ojha concludes.

Note

• Deal count has been taken on the basis of deals announced in a particular period. It excludes rumoured and terminated deals. For all deal types except venture finance and partnership, only deals above $5m have been included. In cases where no deal value has been disclosed, deal transactions are included if the revenue of the target is greater than or equal to $5m
• Deal value analysis is based on transactions where deal value was officially disclosed. For league tables and top PE firm list, deal value has been proportionately credited to advisers/firms
• Value and volume analysis excludes private equity exits
• Private equity deal classification is done where the investor is a private equity firm. It does not include investments made by angel investors, hedge funds, trusts or corporate investors. Such investors are taken into account if they have invested along with a private equity firm
• Asia Pacific throughout the report excludes India and China; Europe excludes Russia; and RoW excludes Brazil

Datamonitor's quarterly Transportation and Logistics Financial Deals Insights, provides an essential assessment of recent M&A activity in the Transport and Logistics sector throughout the world. The report offers a unique insight into deal activity, deal rationale and the market fundamentals driving the sector. It also evaluates the trends within the Transport and Logistics sector as a whole, as well as individual deals.