Business Services Sector Comment – March 2015

Date

Further M&A activity in the logistics sector helps to reinforce the view that the sector is firmly back on the road to recovery.

This month saw the completion of two billion dollar deals, as Japan Post acquired Australia-based Toll Holdings for €4.6bn and Kintetsu World Express agreed to pay €1.1bn to buy APL Logistics.

Japan Post’s acquisition of Toll Holdings is a truly transformational deal for the state-owned insurance to banking conglomerate and will create one of the world’s top five logistics businesses. Faced with a shrinking population and increasing pressure on its traditional letter delivery model, international expansion has been a key priority for the group. However, despite this objective and tie-ups with other international operators, the group has struggled to build any significant presence outside of Asia. The deal comes ahead of Japan Post’s IPO which is scheduled for the second half of 2015 and could raise up to €30bn.

The acquisition of APL Logistics, the logistics business of Singapore-based Neptune Orient Lines, by Japan-based freight carrier Kintetsu World Express is further evidence of recovery in the sector. As with Japan Post’s acquisition, the rationale is centred on international expansion – however, this time there is a focus on the US market. APL Logistics generates approximately €1.6bn of its revenue (63%) in the US and this will significantly bolster Kintetsu US operations. In addition, it is worth highlighting the racy multiple that Kintetsu paid for the asset: at an EV/EBITDA multiple of 15x, it comes as no surprise that the acquisition has been met with some concern by shareholders.

Private equity activity in a sector – typically seen as a bellwether for the general direction of travel – is starting to show signs of recovery. This month saw the announcement of Platinum Equity’s planned sale of Neovia Logistics (formerly Caterpillar Logistics Services) to an affiliate of Goldman Sachs and investment funds affiliated with Rhone Capital. Neovia Logistics provides logistics, warehouse management and fulfilment services, distribution solutions and other value-added services through a network of more than 100 facilities in 25 countries. Platinum Equity acquired a 65% stake in the business in 2012 for €690m and whilst the deal value is not officially reported, rumours suggest the price tag is now in excess of €920m.

Other positive news in the sector includes the recent announcement that private equity group Dunedin has put UK-based CitySprint up for sale. CitySprint has been a star in the same-day delivery market and has enjoyed rapid growth over the last four years, aided by 17 bolt-on acquisitions. Another top performer is Tuffnells Parcels Express Limited which was acquired by Connect Group in November.

However, whilst there is a growing body of positive stories in the sector, recent news that turnaround specialist Better Capital was unable to revive UK-based courier City Link, a business acquired from pest control group Rentokil for €1 the previous year, comes as a timely reminder that the industry still faces its challenges. The changing demands of e-commerce have forced companies to heavily invest in their IT infrastructure as they look to automate their distribution hubs. Companies such as City Link, who have failed to upgrade their systems and are substantially behind the curve, face serious questions over their future competitiveness. UK Mail’s recent €20m investment in automating their distribution hub is a good example of the value placed on technology.

Other groups to have encountered recent challenges include UPS  (with fourth quarter earnings predicted to be 15% below market expectations) and Yodel, the UK’s second largest parcel carrier, reporting a pre-tax loss of €156m in its latest available accounts – largely as a result of sector overcrowding and companies taking their product distribution in house.

Clearwater International expects to see the total number of logistics deals increase over the coming years. The significant decline in fuel costs and the combined economic recovery are likely to improve earnings and free up cash to engage in M&A activity. The bulk of the deals, approximately 80%, will continue to be intra-region as these acquisitions are relatively easy to integrate and offer significant synergies.

 

Notable Business Services Deals

Radnor House School Limited, the UK-based co-educational independent day school and a portfolio company of Albion Ventures LLP, has agreed to acquire Combe Bank School Educational Trust, another co-educational independent school which is based in the UK. Combe Bank School currently has 235 pupils split between its nursery, preparatory and secondary schools. Post transaction, the schools will continue to operate as standalone entities.

Uniserve Holdings Limited, the UK-based international freight and logistics company, has acquired a 50% stake in Seafast Holdings Limited, the UK-based investment holding company with interests in logistics companies. Seafast reported revenues of €26m for the year ended 31 March 2014.

Fortis Developments Limited, the UK-based construction company engaged in the development of student accommodation properties, luxury apartments, leisure properties and regeneration schemes, has acquired Beaumont Morgan Developments Limited, the UK-based construction company engaged in constructing new buildings, conversion, extension and refurbishment of existing constructions.

Kingdom Security Limited, the UK-based company engaged in providing professional security services and security guards, has acquired Sunwin Managed Security, the UK-based provider of manned guarding services, from Cardtronics Inc, the listed US-based owner and operator of automatic teller machines. Sunwin employs around 640 security professionals.

James Fisher and Sons plc, a listed UK-based company engaged in the provision of marine and specialist engineering services, has acquired National Hyperbaric Centre Limited, the UK-based company engaged in providing diver and subsea training, hyperbaric welding, subsea testing, diving medical emergency and consulting services to subsea pressure-related industries, from David Smith.

Exova Group Limited, the listed UK-based company engaged in providing testing, calibration, advice and related services, has acquired Environmental Evaluation Limited (EEL), the UK-based company engaged in environmental testing, inspection and consulting services, for an undisclosed consideration. EEL reported a workforce of 83 employees. The acquisition is in line with Exova’s strategy of extending the reach of its business and developing its service offering through strategic acquisitions in its customer sectors.

SMG Holdings Inc, the US-based provider of construction and design consulting, pre-opening services, venue management and a portfolio company of American Capital Ltd, has acquired CGC Events Limited, the UK-based event catering company. CGC Events generated a turnover of €29m for the year ended 1 March 2014 and has a workforce of 200 full-time employees.

FF&P Private Equity Limited, the UK-based private equity firm, along with the management team of Kallidus Limited, the UK-based provider of learning, performance and talent management solutions, has acquired the company in a management buyout transaction from WestBridge SME Fund, the UK-based private equity fund of WestBridge Capital LLP.

CBPE Capital LLP, the UK-based private equity firm, along with the management of Compre (1) Limited, the UK-based provider of consulting and managed services to the international insurance industry, has agreed to acquire the company in a management buyout transaction for an undisclosed consideration. The management team is led by Mr Nick Steer, the CEO of Compre. CBPE will also invest additional equity to support the acquisition of new business, either by way of acquiring further European insurance carriers or by way of portfolio transfers from reinsurers.