Forwarding Corral

DSV’s Panalpina Takeover Precursor to More Acquisitions?

By Lori Musser

In the highly fragmented third-party logistics industry, a merger of two giants is typically a step toward lower transportation cost, and improved asset utilization, productivity and efficiency across all logistics operations.
Industry observers predict these very gains following the integration of DSV A/S and Panalpina Welttransport Holding AG. As the two companies carry out their plans, cargo owners, including those in the breakbulk and project cargo industries, may prove to be the chief beneficiaries.

David Kerstens, equity analyst with Jefferies LLC said, in his Big is Beautiful & Accretive equity research, August 2019: “DSV is the best-in-class freight forwarder, with the highest yields in air and sea freight, resulting in a fiscal year 2018 EBIT margin of 10 percent, double the industry average.” The company is also highly profitable in road freight and contract solutions.

“With the DKK 35 billion takeover of Panalpina, DSV has become the world’s fourth-largest freight forwarder, with top-three positions in air, sea and road freight,” Kerstens wrote.

The merger is expected to drive scale economies and synergies. “We are projecting EBIT growth accelerates from 12 percent per annum historically to 18 percent per annum going forward,” Kerstens said. That is 50 percent higher than the sector’s average.

Kerstens indicated that the transaction’s settlement price, with a high multiple of estimated earnings, reflected Panalpina’s relatively low profitability and substantial synergy potential.

“The preliminary synergy target of DKK 2.2 billion lifts Panalpina’s profitability to DSV’s current levels by FY22E,” which accelerates EBIT growth, Kerstens said.

Steadily Integrating

Flemming Ole Nielsen, executive vice president of investor relations for DSV Panalpina, described the unification to Breakbulk: “We are combining the two global networks of DSV and Panalpina, which means that this integration touches 90 countries, the global headquarters and back-office functions. The target is of course to create a larger and stronger organization while preserving the value of both.”

Nielsen explained that the integration was moving forward as planned, integrating country by country. At the time of writing, the combined company had already onboarded the largest Panalpina countries of the U.S., China and Germany, as well as a number of smaller countries. As at January 2020, more than half of the Panalpina business had been moved to DSV’s systems. Onboarding, in the DSV vernacular, includes consolidating offices where the two networks overlap, and, importantly, operating on one IT platform.

Nielsen continued: “We expect that most of the integration will be completed during 2020, and this means that by 2021 we expect to achieve the full impact of the synergies.”

DSV had, it seems, had its eye on Panalpina for many years, with Nielsen describing it as “the best match for DSV,” and offering growth potential. As a result of the combination, the new company has a significantly increased presence in the Americas and Asia-Pacific, and has strengthened its verticals to include automotive, industrial, technology, consumer retail and fashion, healthcare, chemicals, oil and gas.

Evan Armstrong, president of supply chain consultancy Armstrong & Associates, believes that Panalpina will benefit greatly from DSV’s systems and culture. “The networks fit together,” he says. “They have a lot more capabilities together than they had individually.”

New Value Proposition

DSV Panalpina has increased its scale, service potential and buying power with carriers.

Panalpina brought additional expertise and talent to the table, and DSV brought new service offerings for Panalpina customers, including its comprehensive road freight network and global contract logistics services.
After the priorities are tackled, there will likely be more service improvements, largely predicated on DSV’s digital platform.

“From a contracting standpoint, DSV Panalpina has more buying clout with carriers and that should translate to more capacity for customers,” Armstrong said. “Service should improve. Pricing could improve, but having more capacity is the more important part.”

For the volume-based container trades, that new buying power may concern carriers. For the oil and gas industry and other industrial sectors with out-of-gauge cargo, a 3PL’s buying power may be helpful, but its expertise in end-to-end movement of special cargoes is vital. DSV Panalpina’s newly upsized worldwide network may even facilitate diversification of project sourcing.

The consolidation of operations, administrations, warehouses and logistics facilities will eliminate redundancy within some markets, potentially making way for increased capacity in growth and emerging markets, according to Armstrong.

Both 3PLs have successful project solutions arms. Where DSV cites strengths in renewable energy, government logistics to conflict areas, industrial project logistics and ship and air charters, Panalpina touts global coverage for oil and gas, but also in the mining, industrial and renewables sectors.

Armstrong noted: “The combined entity with almost 3 million 20-foot-equivalent units of ocean freight and 1.7 million tonnes of air freight has very good project logistics capabilities and experience with large oil and gas shippers such as Chevron, Exxon and others. Its systems backbone of GNTS and CargoWise provides for good international transportation management, shipment visibility, and exception management.”

Two years ago, Panalpina launched Panprojects Carrier to oversee multimodal heavy-lift moves from fabrication to installation sites under a single contract.

Already adopted by the new DSV Panalpina, the idea of a no-hassle movement has great appeal. Best possible contractual clarity coupled with a single point of contact should greatly reduce commercial, technical and contractual risks, especially if responsibilities are clearly stipulated for each leg of the transport and for associated services.

Project cargo owners will watch closely to see if, as the integration continues, the Panprojects group will enhance its services and global multipurpose/heavy-lift carrier network, said to be 2,300 vessels strong.
Overland carrier relationships are expected to strengthen too, on the basis of DSV’s leadership in the market, especially in Europe.

Synergies Support Financial Strength

Nielsen told Breakbulk that in freight forwarding, size matters: “The more shipments you control, the more bargaining power you have, the better the rates/conditions you can secure with the transport suppliers (road, air, sea and rail) which you’re then able to offer to the customers.

“With previous transactions … we have demonstrated that we can lift the profitability of the acquired company to DSV’s levels. And maybe even above historical levels as scale benefits kicks in. This is the business case for both DSV’s and Panalpina’s shareholders in a nutshell: we can achieve more together.”

Nevertheless, in a fiercely competitive environment, “Success requires good old-fashioned hard work, meticulously preparing tender proposals and repeatedly meeting with customers – and delivering on spec and on time. We’re prepared to put in the hard work,” he said.

Thomas Cullen, analyst at London-based Transport Intelligence, said that any suppositions about the new company’s prospects have to be based on its experience: “Previous acquisitions have been spectacularly successful for DSV. Presumably they will be able to drive forward Panalpina’s forwarding operations just as effectively as they have done at UTi and others. Bearing in mind that Panalpina’s market positioning was reasonably good, this suggests they will have a significant impact on the market.”

However, as with any big merger this is a big and complicated task, which must be executed as quickly as possible to avoid building insecurity in the organization and to maintain service levels towards customers. There are also legal considerations related to the merger that impact timing and negotiations.

Asked if there is an end in sight to the merger and acquisition trend that has swept across transportation sectors, Nielsen replied, “presumably not.” In his eyes, bigger is often better when it comes to freight forwarding, as consolidation makes a lot of sense in this very fragmented and competitive market. However, he makes it clear that the Panalpina integration currently has the team’s full focus and emphatically states that they are “not thinking about the next transaction” … for now.  

Based in the U.S., Lori Musser is a veteran shipping industry writer.

Image credit: Panalpina