There is no doubt that in the last couple of years, growth in the global freight forwarding market has been exponential, with Transport intelligence’s July report identifying an increased growth rate of 11.2% in 2021, which is notably the fastest expansion rate in a decade. In addition, 2022 YE results are forecasted to expand by 5.7%, presenting opportunities for significant uplift in the profitability of freight forwarding operators.
However, figures were viewed with scepticism when determining if this profitability could be sustained, in the context of multiples achieved and deal structures seen in M&A. This was compounded in findings published by the index of Global Trade Health in July. Reports observed the start of a predicted drop off in supply chain demand, analysing the cumulative growth of invoices and orders as matching those witnessed in pre-pandemic levels. As July marked the beginning of H2, economists identified data patterns which suggested a prolonged period of declining order volumes that may test the cash flow, especially across the smaller forwarders forced to manage soaring overheads amidst supply chain disruption.
At Connect Corporate Finance, this market volatility was notable in our conversations held with business owners. Whilst the prediction of a decline in freight rates had been noticed by analysts, this hadn’t yet followed through to the market itself. Assessing, the reality of sustained growth from the buyer’s perspective and vice versa in the seller’s remains a challenge in valuation expectations that we are trying to bridge. This gap was exacerbated due to the larger deals witnessed in the sector achieving higher multiples than normal. Driven by shipping lines who are looking to expand their offering and accelerate their growth to become established end to end supply chain providers.
An impressive surge in deals turned August into a memorable month for the Freight & Logistics sector which may have come as a surprise in light of the declining rates beginning in July. However, this was a knock-on effect to several factors occurring in H1 of 2022, such as improved supply chain dynamics and substantial improvements to the industry’s earnings profile. Inevitably, these variables have attracted new players into the logistics market with sustained interest from private equity houses, as reinforced in the second quarter of 2022 when more than 50% of transactions in the UK were PE led (Source: BDO UK & Ireland M&A Update).
Continued momentum saw 15 deals close globally in August:
· Lineage Logistics acquires Grupo Fuentes
· Spanish based Aduanas Alié acquired by The Rhenus Group
· Lineage Logistics closes acquisition of Versacold Logistics Services
· UPS set to acquire healthcare logistics provider, Bomi Group
· Umani Group acquires Runtime Belgium Group
· SEKO acquires US based 3PL Pixior LLC
· Cargo Partner acquires 1/3 of Sim Cargo
· GRUBER Logistics acquires Universal Transport
· GEODIS acquires Need It Now Delivers
· Transporeon acquires Tracks, a Berlin based start-up looking to decarbonise the transport industry
· Rhenus acquires DKI Logistics A/S
· Hub Group acquires TAGG Logistics to expand fulfilment offering
· Freight 24 acquires Keyes Transport
· Bolloré completes acquisition of Lynair Logistics to bolster Australian footprint
· ITD Global backed by UK PE investor, BGF in £15m investment
Connect Corporate Finance also had a strong August, with a new mandate from a leading delivery & logistics service provider, located in Asia. Connect will undertake market analysis for targets in Europe and Australasia on behalf of the new client.
September confirmed what industry experts had feared in July, Far East spot rates plummeted by 45% within 20 days, highlighting the biggest decline since 2012. SCFI spot rates were listed as $3,050/FEU to US WC and $3,545/TEU to Europe, which poses the question as to whether these declining rates might finally depict a more stabilised and realistic landscape, from a valuation perspective in M&A transactions.
In the short-term, this has created a more fragmented market, exacerbating tensions between the carriers and forwarders, with regards to the contracts which were agreed upon. Two possible scenarios include the renegotiation of contract rates or alternatively transferring contract cargo into spot bookings and although this may have been common practice pre-2020, new areas of contention mean carriers now have different viewpoints. For instance, some contracts are ambiguous in that they state a minimum quality commitment, but there are no tangible requirements on which week cargo will be shipped or on what service route. Equally, there are contracts which might be more legally binding in stating clear obligations between shipper and carrier whereby project stipulations are clearly stated on a weekly basis and port routes are specified. The evolvement of these types of contracts has shown how the industry is beginning to modernise in terms of implementing measures, which will better manage supply chain disruption.