PwC Reports M&A Uptick in Supply Chain Space

By SCMR Staff

August 12, 2014

Merger and acquisition (M&A) in the transportation and logistics sectors saw decent gains in the second quarter, consultancy PwC reported last week.

Deals cited by PwC in its data report represent all announced deals for the quarter-as opposed to completed deals only-and the report does not parse out deals that are withdrawn, intended, or pending, and only deals valued at $50 million or more are included.

Unlike the first quarter, which saw declines on both a quarterly and sequential basis, the second quarter pace for deal-making activity was brisker, showing gains over both the first quarter of this year and the fourth quarter of 2013.

For the quarter, PwC said there were 51 transportation and logistics transactions values at $50 million or more for a total of $20 billion, which was ahead of 38 deals for a cumulative $16.2 billion recorded during the first quarter and the 39 deals valued at a cumulative $16.b billion in the second quarter of 2013.

Average deal value in the second quarter––at $393 million––was down compared to the first quarter average of $427 million and the second quarter 2013 average of $425 million. PwC said “mega deals,” which it defines as deals valued at $1 billion or more, were low in the second quarter and served as a driver for lower overall deal value. There were three mega deals in the second quarter, representing a cumulative value of $9.63 billion, with two of the deals originating in Australia and the third one in the United States. In the first quarter, there were four mega deals, with a total value of $9.39 billion.

Local market deals remained the key focus when inking deals, according to PwC, with 2014 expected to be the lowest year on record for cross-border deal activity in the last decade. Local market deals represented 71 percent of second quarter deals, down from the first quarter’s 76 percent and up from the 69 percent recorded during the second quarter of 2013.

“Transaction volume picked-up in the transportation and logistics industry during the second quarter although overall levels remain modest compared to historical norms,” said Jonathan Kletzel, U.S. transportation and logistics leader at PwC. “Management teams continue to take a measured approach to M&A and remain primarily focused on local deals aimed at consolidating existing markets and strengthening their core businesses.

Similar to what we saw at the start of the year, deal activity was primarily driven by increased activity in the shipping and trucking sectors, with an emphasis on addressing overcapacity, fragmentation and sourcing higher margin services.  Looking ahead, we believe transportation and logistics M&A activity will increasingly focus on higher margin, ancillary operations, including assets that benefit supply chain economics and lead to improved operating efficiencies.”

Other key data in the report showed that:
-Asia- and Oceania-based acquirers were the most active of any global region, representing 22 total transactions, with the Eurozone next at 14, while there were 9 U.S.-based deals, with U.S. activity still below pre-financial crisis levels;
-deal multiples were at new highs, with PwC explaining that the general increase in equity market valuations contributing to higher deal valuations, and infrastructure-related deal still popular and represented two of the three mega deals in the quarter; and
-financial investors representing 51 percent of PwC’s recorded deals, topping the first quarter’s 42 percent.

When asked if overall deal levels are somewhat modest compared to historical norms, Michael Portnoy, industry analyst in PwC’s Industrial Products practice, explained that has to do with the cyclical nature of transportation and logistics deal making activity.

“Transportation deal making is cyclical, and we’re several years past the global recession so much of the pent up demand from that period has already hit the market,” he said. “In addition, valuations are high, which can make it more challenging to add value through acquisition. Another factor is that there has been more action in trucking and shipping where some of the constituents are smaller companies compared to modes like airlines and rail. This has helped to restrain deal values.”

The trucking sector, said Portnoy, is “ripe for consolidation,” with financial performance lagging most other areas of transportation, coupled with fewer antitrust issues, too.

The decline in cross-border deal levels stem from a few different things, including a big shift toward horizontal consolidation, which Portnoy said means that transportation operators are acquiring more within their own broader modes, due to the emphasis on improving performance.

“This oftentimes also leads to tie-ups between parties in the same geography,” he said. “Also, emerging market companies, which are involved in about one-quarter of transportation deals, have shifted their focus more to their own local markets. We believe that this is due to better return opportunities.”