M&A Outlook Transport & Logistics kpmg.co.uk

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1 M&A Outlook Transport & Logistics 12 kpmg.co.uk

2 1 M&A Outlook Transport & Logistics 12 Transport transactions in 12: Stepping up a gear Transport and Logistics ( T&L ) M&A activity hit a four-quarter high in the first three months of 12, with the underlying drivers of transactions aligning to fuel US $27.9 billion of completed and announced transactions. The emerging trends suggest that 12 is poised to be a year for accelerating global M&A activity in the transport and logistics sector. We think that activity will be driven by four factors: Significant war -chests built up during the economic crisis are now ready for deployment. Strategic and financial investors looking to capitalise on emerging trends in high growth niche markets including e -commerce, time and temperature sensitive delivery, and secure courier requirements. A need for scale and consolidation in traditional T&L segments including post, passenger transport and shipping. Continued appetite from infrastructure investors for quality airport, port, and road assets. M&A activity has traditionally been a barometer of confidence, and on this basis the prognosis is good. 11 and 1 transaction levels (measured by value and number) exhibited a return to normality over crisis -hit 9. Although M&A levels in the second half of 11 were impacted by sovereign - risk related financing uncertainty, the new -year has hit a higher gear. Although short -term factors such as further fuel -price shocks and debt - market jitters may influence the timing of activity, we think that the imperatives for change are aligned to drive activity in the medium term. This report looks at the transactions landscape in transport and logistics in 11. It examines the driving forces behind these trends, which can be characterised as follows: Average transaction values lower than 1 (particularly in North America) reflecting the distorting impact of the US $36.7 billion Burlington Northern Santa Fe deal in prior year, and the impact of distressed M&A particularly in H211. Strong growth in EMEA fuelled by a number of landmark transaction including the divestment of TNT Express for US $7.2 billion. EBITDA and Sales multiples increasing for the third consecutive year, as EMEA multiples converge. 122 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated filiated with KPMG International Cooperative, e, a Swiss entity. All rights reserved. ed.

3 M&A Outlook Transport & Logistics 12 2 Transactions Market in 11 Reduced speed in the second half As graph 1 shows the number of transactions in 11 remained at a similar level to the previous year. This demonstrates that 1 was not an exception, and that the recovery from the 9 post-recession low point appears stable. Indeed, the first half of 11 recorded an increase in the total value of transactions on the second half of 1. The second half decrease reflects the increased uncertainty and reluctance of investors in the wake of the debt crisis in the European Union. In value terms, 11 average transaction size was lower than 1. Although there were large strategic transactions in the first half of 11, more small transactions and bailouts ( distressed M&A ) were observed in the second half of the year, depressing average values for the year. Despite the drop in total transaction values compared to 1, the mergers and acquisitions market for transport and logistics remains buoyant. In 11 M&A transactions totaled US $52.1bn: twice the equivalent figure in 9. Graph 1 Transactions in transport and logistics ) alue (US $bn Transaction v H1 H2 H1 H2 H1 H2 H1 H Transaction value (US $bn) Number of transactions Numb er of transacti ons The emerging trends suggest that 12 is poised to be a year for accelerating global M&A activity in the transport and logistics sector. 122 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated filiated with KPMG International Cooperative, e, a Swiss entity. All rights reserved. ed.

4 3 M&A Outlook Transport & Logistics 12 Europe leads the way Graph 2 Transactions by region 1 1, 1,56 1, , Transaction value (US $bn) Number of transactions North America Latin America EMEA ASPAC Number of transactions The drop in total transaction value in the transport and logistics sector in 11 was most pronounced in the regions of Asia-Pacific (ASPAC) and North America, as shown in Graph 2 (right). In North America the number of transactions was stable, however the total transaction value declined to US $4.7bn from US $45bn in 1. 1 was exceptional in North America, due to the purchase of Burlington Northern Santa Fe by Berkshire Hathaway with a transaction value of US $36.7bn. In ASPAC there was also a (less dramatic) decrease in transaction value. In Latin America the transaction value grew significantly, albeit from a low base. However the major story is the increase in transaction value in the Europe, Middle East and Africa (EMEA) market. Transaction values in 11 were US $3.1bn in comparison to US $12.7bn in 1. The number of transactions in EMEA was very similar to 1, indicating a number of landmark transactions in 11. These include: The divestment of the TNT Express branch for US $7.2bn; The investment of French sovereign wealth fund, Caisse des Depots & Consignations of 26.3 percent in La Poste SA, with a value of US $2.1bn; and The sale of 38 percent in equity of the Brussels airport to Ontario Teachers Pension Plan for US $1.7bn. 12 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

5 M&A Outlook Transport & Logistics 12 4 Strong valuation levels suggest positive outlook Valuation multiples of transactions (the ratio of enterprise value to sales, and EBITDA) during the last three years have increased. Valuation levels are now almost at the levels prior to the outbreak of the financial crisis in 8. This demonstrates the increased confidence of investors in the transport and logistics sector, and the renewed appetite for mergers and acquisitions. Graph three (right) demonstrates this. On closer observation, however, there are large differences between the individual regions. In EMEA, for example, the valuation levels are particularly high. A trend toward increasing valuation levels can also be seen in North America and ASPAC, albeit somewhat less dramatic than Europe. Despite an increase in total deal value in Latin America, the valuation levels are decreasing. In North America and EMEA it can be seen that in 11, the EBITDA and EBIT multipliers have converged so that they are now almost identical to each other. This shows that in 11, a number of the key transactions in these regions related to asset-light companies. Graph 3 Valuation multipliers for transport and logistics M&A Multiple (x) EV/Sales EV/EBITDA EV/EBIT 12 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

6 5 M&A Outlook Transport & Logistics 12 The new transport investors The final key conclusion from 11 is that Private Equity businesses are showing renewed appetite for the transport and logistics sector. Historically the market was unattractive to financial investors, due to comparatively low growth and small margins. However, from 6 financial investors started to show strong appetite for the sector. Private Equity has been interested niche markets with high margins and growth opportunities, and high entry barriers. Companies in those niche markets are typically logistics companies active in the transport of time-sensitive and temperature controlled products. These include food, medicines, chemical products or hazardous freight. Against the general trend total transaction value traded by financial investors actually grew in 11 compared to 1, though still remains low compared to 6-8. Transaction value by investor type is shown in graph 4 (right). Graph 4 Transaction value by investor type Transaction value (US $bn) Financial investors Strategic investors 12 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

7 M&A Outlook Transport & Logistics 12 6 Outlook 12: On the runway? The first quarter of 12 showed growing M&A activities in the transport sector compared to the second half of 11. This can be clearly demonstrated in graph 5 (right). Overall, 177 transactions with a total value of US $8.2bn have been completed. A further 147 mergers and acquisitions with a total value of almost US $ bn have been announced in the first quarter of 12 representing a significant increase on 11. Again, Europe has been the centre of M&A activity, with the largest number of transactions completed in Q1. To make this strong start to FY12 sustainable, three key factors must be met: Confidence in sustainable economic recovery: This depends mainly on continued market trust in the solutions to the European debt crisis. Should the economic outlook remain stable, business activity could improve as early as the second half of 12 Investment pressure on financial investors: The pressure on financial investors to deliver strong returns is high, following a disappointing year in 11. However, many Private Equity firms are finding it difficult to attract financing, and the ability to attract new financing will be a key factor in the outlook for 12. Graph 5 Quarterly deal values in transport Transaction v alue (US $ bn) Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Completed transactions M&A Appetite of strategic investors: The M&A appetite of transport and logistics firms is often correlated with their debt capacities. This is higher than in previous years. In particular, companies in the Logistics and Express segments currently have deep pockets and stand ready for more strategic acquisitions. This has been recently evidenced by UPS acquisition of TNT Express. The key sectors to watch over the coming year are shipping and logistics. In the global shipping market, the outlook for the next year is bleak, with overcapacity expected to remain. Announced but not yet completed or withdrawn 3 As a result, there is likely to be further need for consolidation through distressed M&A, though the transaction sizes will be reasonably small. The logistics market, particularly in Europe, remains fragmented. Private equity investors looking to invest in niche markets, and the ongoing need for consolidation, are likely to drive M&A activity in this sector. Should the trend established in Quarter 1 continue, 12 could be an exciting year for transport and logistics KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

8 Contact us Dr Ashley Steel Partner, Global Chair for Transport T: +44 () E: James Stamp Partner, Mergers and Acquisitions T: +44 () E: Julian Zatouroff Partner, Global Head of Logistics T: +44 () E: Dr Steffen Wagner Partner M&A, European Head Transport & Logistics T: E: The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 12 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. RR Donnelley RRD-278 May 12