THE continuing wave of mergers and acquisitions (M&A) in the logistics industry is reshaping the sector and does not look likely to end soon.
The latest move came last week when Transocean Holdings Bhd announced plans to acquire the entire equity interest in container haulage firm Taipanco Sdn Bhd. The reverse takeover will cost RM140 million, which will be satisfied via new Transocean shares and redeemable convertible preference shares (RCPS).
It is a massive bite for Transocean, whose market capitalisation as at last Thursday was just RM36.9 million. It registered RM26.3 million in total revenue for the financial year ended Dec 31, 2016, compared with Taipanco’s RM89.5 million revenue for 2015.
What catches one’s attention is that executive chairman Tan Sri Mohd Nadzmi Mohd Salleh will relinquish majority control, with his overall stake set to fall from 65.16% to 18.68% after the acquisition. His stake could dilute further to 14.76% upon full conversion of the 38 million new RCPS issued.
The company says the acquisition — which includes a profit guarantee — is aimed at revitalising its “lacklustre financial performance … [which had] been deteriorating over the past four years”.
The deal adds to the string of M&A exercises announced over the past 15 months within the logistics landscape.
This year alone, land logistics M&A deals up to mid-March have exceeded RM1 billion in collective value (see table), compared with RM1.3 billion for the whole of last year.
“What is happening is that the key players in the industry are merging to become larger ones to stay more competitive in their respective spheres,” says Edwin Yeap, executive director at Century Logistics Holdings Bhd. “This is a global trend.”
This is just one emerging theme from the string of deals announced since last year. Another noticeable theme is that foreign logistics firms are gaining a foothold in Malaysia by taking strategic equity stakes in local players.
“You can already see big regional players — like the Chinese, Japanese, Koreans — piecing together their regional network via strategic acquisitions,” Yeap says.
For example, South Korea’s biggest logistics group, CJ Korea Express Corp, gained a foothold in Century Logistics via a 31.44% stake worth RM174.79 million last year.
In the same year, Japan’s Yamato Holdings Co Ltd purchased 10 % of GD Express Carrier Bhd shares worth RM217.3 million. It subsequently increased its stake to 22.8%.
Eventually, the consolidation wave will follow, like that in other markets such as Australia, Europe and Japan, TASCO Bhd managing director Freddie Lim says.
According to Lim, the fragmented industry will shrink into two distinct categories: “Big players with economies of scale and smaller players focusing on a niche market.”
TASCO itself is majority-owned by Yusen Logistics of Japan, which is part of the Japan-based NYK Group. Yusen controls 65% of Tasco shares. NYK Group is one of Japan’s largest shipping and logistics companies.
Lim had previously told The Edge that the company’s venture into the cold chain logistics segment via acquisitions worth RM329 million, announced in January this year, was part of a regional expansion push under its parent company.
However, as consolidation increases the reach of the existing players, it may create pressure among peers to seek their own M&A exercises to keep up.
Malaysia’s logistics sector is ripe for defensive M&A as it is still relatively fragmented compared to other markets, say Tan Yow Ken, transport and logistics analyst at MIDF Research.
“The sector could experience a shakeout period where smaller players merge or get absorbed by larger ones,” Tay tells The Edge. “Companies unwilling to be subject to a takeover attempt might seek out friendly equity partners.”
Pressure to seek defensive M&A is building up. TASCO’s Lim says that when the company clinched its M&A deals for the cold chain venture, there were other interested parties pursuing the same target companies.
Lim says the competing suitors were cold chain players from other countries eyeing expansion into Malaysia.
And TASCO is still on the prowl for further mergers or acquisitions, he says. “We are not shutting down any opportunities. We are still looking for opportunities to grow,” he says, adding that financing is not an issue should the need arise.
Century Logistics’ Yeap feels the same way, saying the market has evolved and now demands big, vertically integrated logistics players with a myriad of services.
A key factor is a shift in client requirements in recent years as cargo owners increasingly seek logistics solutions for various niches under one roof. From the cargo owners’ perspective, it is much easier to manage a fewer number of third-party logistics partners by engaging one company for everything it needs.
“We now see a lot of cross-enquiries [after the cold chain acquistions were announced],” Lim says. “A lot of clients expressed interest in the cold chain segment that we are acquiring.”
While conceding that pressure could then be building up for defensive M&A exercises in the market, Yeap says it is easier said than done, especially among two entrepreneur-driven logistics firms. The exception could be privately held companies whose owners are dealing with succession issues.
“We are seeing the traditional entrepreneur-truckers selling out because they have no one to take over their businesses,” Yeap says. “We [Century Logistics] have got at least two approaches from such players to consider acquiring their fleet.”
Apart from succession issues, mergers between local players are tricky mainly due to valuation problems. Yeap says a common problem is a mismatch of pricing expectations between prospective buyer and seller.
“It’s tough for mergers between local logistics players — to cooperate together may be possible, but outright mergers are much harder to happen,” he says.
Foreign players may find it easier to surmount the valuation hurdle as their balance sheets may be bigger, enabling them to expand overseas.
Additionally, they will see a bigger premium in local know-how and a firm’s existing client base as starting fresh is impractical, adds Yeap.
When the dust settles on the consolidation phase, the emergence of a smaller pool of bigger logistics players will place further emphasis on efficient operations to stay competitive, Yeap says.
“To be a big player, you must have the expertise to compete with [others], you have got to be the best in that expertise.”
In that respect, local firms backed by bigger, regional players may have an edge, according to TASCO’s Lim. He says such firms can combine their crucial advantage of capable talent, market familiarity and flexibility with a regional player’s branding, extensive network and more advanced systems.
From the investing perspective, MIDF’s Tay feels fully integrated logistics firms are the way forward as they are able to meet all the needs of customers, particularly multinational firms.
“Investors should look for companies that have advantages in scale and are able to continue scaling up,” he says. “These are the players who are able to deliver services efficiently and at a lower cost.”
Such firms will also need sufficient warehousing and transporting capacity to cater for ad hoc demands of their customers, adds Tay, who has a “buy” call on Tiong Nam Logistics Holdings Bhd.
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