M&A activity in logistics sector jumps in Q2

According to PwC US, transportation infrastructure deals remain attractive, with regional domestic local transactions accounting for almost 75% of deal volume.

Deal activity in the transportation and logistics industry jumped nearly 15% in the second quarter of 2011 compared with the prior year period, according to Intersections, a quarterly analysis of global M&A activity in the transportation and logistics industry by PwC US.

Despite increased concerns over a potential economic slowdown, the majority of factors influencing deal activity – including the attractiveness of investment in many parts of the sector and the availability of financing – are positive and warrant a gradual recovery in deal levels.

For deals worth $50 million or more, there were 47 announced transportation and logistics deals worth $13.5 billion in the second quarter of 2011, six more deals than in the same period of 2010. While deal value dropped from $18.4 billion in the second quarter of 2010, value was up approximately 30% from $10.4 billion in Q1 2011. For the first six months of 2011, there were a total of 92 announced deals worth $50 million or more, putting deal activity in T&L on track to meet 2010 levels.

Kenneth Evans, US transportation & logistics leader for PwC, said that the longer a moderate recovery continues, the more likely it is that strategic acquirers will feel pressure from investors to use their relatively ample liquidity positions to find ways to supplement organic growth. He added that this trend should provide for incremental gains in total transportation and logistics deal volume and value announced during the second half of 2011, with an environment more conducive to larger deals contributing to gains in average deal value.

While shipping and passenger air deals drove the majority of deal value in the second quarter, accounting for 65% of deals worth $50 million or more, continued interest and activity in transportation infrastructure remains a key driver for M&A in the sector.

For the second consecutive quarter, the largest deal was in the infrastructure sector, in addition to two of the three mega deals announced in the second quarter of 2011. PwC believes that infrastructure deals should continue at a robust pace in developed markets because of budget issues. Large countries are grappling with the need to make transportation infrastructure improvements while also pursuing fiscal austerity. This could potentially drive additional mega deal activity globally in the second half of 2011.

The second quarter of 2011 also saw deal multiples remain at nearly a ten-year high. Transportation and logistics deal valuations increased during 2011 compared with the previous year and remain above long-term norms.

"The increase in controlling interest stakes and coinciding decline in minority stakes are helping to fuel higher valuations, because acquirers typically pay premiums to gain majority ownership," said Evans. "Acquirers are demonstrating greater interest in and ability to engage in new deals during 2011, which should support relatively high multiples for targets in the sector."

Strategic acquirers accounted for 30% of total deal volume and 23% of total deal value, and were behind two of the three mega deals in the second quarter of 2011.

Regional distribution of transportation and logistics deal activity during the second quarter of 2011 indicates acquirers‘ focus on consolidating regional (e.g. Asia and Oceania) and local markets, as nearly 75% of deal activity took place domestically.

Asia and Oceania lead domestic deal activity with seventeen transactions valued at $5.8 billion in Q2. According to PwC, the relative fragmentation of the transportation and logistics sector in emerging markets is due to companies‘ focus on building domestic scale before entering the global marketplace.

"The strength of domestic deals is somewhat surprising given that, during a recovery, companies might be expected to be more willing to take on the challenges of cross-border transactions," added Evans. "However, considering the importance of Asia and Oceania entities to the overall M&A market and the prevalence of higher-growth emerging markets in this region, it seems most plausible that these companies are finding better return opportunities on deals in their local markets than they are in foreign countries."

Recognising that there are several risk factors that could potentially derail deal activity in transportation and logistics (including further weakness in the US housing market, overhang from European sovereign debt problems and the risk of overheating in several BRIC countries), PwC believes that one of the most significant concerns in the industry continues to be corruption, an issue particularly heightened during a robust period of M&A activity.

"With more regulatory and government bodies taking a closer look at corruption, organisations face intensified risks in regions where corruption is pervasive and corrupt practices are longstanding – at times, even accepted as status quo," said Evans. "The threat of corruption and bribery can be particularly great for transportation and logistics companies conducting business in certain countries, potentially diminishing deal value. Dealmakers in the sector need to be on heightened alert for corruption related issues and ensure their diligence and strategies include significant programs in place to mitigate these threats."