Shipping Container M&A: Sign of Weakening Economy

A few weeks ago it was announced that Triton and TAL would merge to form a massive container leasing line with nearly 5-million TEU’s in the combined fleet.

On Friday news came of Chinese Government approvals for COSCO and China Shipping to merge and become the 4th largest global shipping line… Just one spot behind CMA CGM, who is working on acquiring Neptune Orient Lines (APL), and three spots behind industry leader Maersk (who is telling anyone who will listen that the market needs more consolidation).

Logistics is not unique in the amount of M&A deals taking place, Dow and Dupont just announced a “mega-merger” as we close out what Forbes is calling “the best year for M&A since the financial crisis” (with no irony intended).

From ketchup to petroleum, everybody is getting in on the multi-billion-dollar mergers and acquisitions bandwagon.

Companies of all sizes are getting in on the action.  Tuck-in acquisitions are all the rage for smaller companies and mid-caps.  So much so that one out of every two CEO’s surveyed by PwC said they planned to be a part of an M&A deal in 2015.

Why All the M&A Activity?

The best growth is organic growth… but that’s really hard and time consuming.

It’s much simpler, particularly right now, to just buy someone else’s market-share.  It’s also cheap.  As the Fed continues to drag their feet on interest rates, and corporate cash on hand continues to swell from a strong economy, acquisitions are far more attainable than they’ve been in several years (since, as Forbes reminded us, the financial crisis).

Logistics Industry Growth Flattened in 2015

The shipping industry has long been viewed (and statistically proven) to be a leading indicator of the greater economy.  In 2015 trucking companies and shipping lines saw growth at nearly flat, and last week the Wall Street Journal reported new truck orders sank to a five-year low.

However, growth expectations persist.  And for those companies that are publicly traded, living 90 days at a time, flattening growth is unacceptable.

Fortunately for CEO’s, there are other ways to drive up your stock price.  Issuing a dividend or buying back stock is one way, but there’s only so much air to let out of that balloon…  Those plans also cannibalize the balance sheet of a company, giving away cash to investors rather than re-investing within the business or keeping it on-hand as we enter a tougher economic climate.

However, if you want to grow both the size of your company and your share price simultaneously in an otherwise flat market, you can always buy someone else and gut them (after adding their revenue, of course).

Is M&A a Viable Substitute for Organic Growth?

Growth is always the goal, but M&A almost certainly cannot be the preferred method.  Except for situations of distress, acquisitions are almost always paid for at a premium price.

For instance, CMA CGM appears to be offering what equates to a 49% premium on Neptune stock (you know, what the market values the company at).

But paying a premium is necessary to get a deal done.  Unless the acquiring entity offers above market rate, there is little incentive for a company to accept.

As demand for M&A deals increases, and organic growth continues at a sluggish pace (or even begins to wane) in 2016, accepted multiples for valuation can only increase.  Essentially creating a bidding war for those companies that are available for acquisition.

This might be why AFTER a deal is done most companies don’t see the return they anticipated.

Deloitte found 9 out of 10 public companies did not achieve intended ROI.  To put that ratio in context you’re more likely to find a CEO that says their most recent acquisition under-performed than you are a dentist that recommends Trident Gum.

The numbers are even worse for private equity acquisitions, with 96% of PE firms saying their acquisition missed ROI expectations.

Why Does M&A Tend to Miss Targeted ROI?

As the New York Times recently pointed out, increased M&A usually is a signal of the culmination of a Bull Market.  The logistics industry is already starting to feel some of those pains.

However, this does not change the acquisition price of a company.

CMA CGM can’t offer Neptune 85% of its current stock price and have any reasonable hope of acquiring the company.

But the trends are not positive.  Companies are paying premium prices as we enter a time of presumed economic instability.  So, how will they attempt to make their M&A investment pay?

Layoffs.

For instance the Triton-TAL deal is said to be attractive due to an anticipated $40-million in “SG&A Synergies” (which is the most corporate way to say “we’re going to fire a shitload of potentially redundant staff and pretend that savings is new profit”).

The Deloitte survey mentioned earlier found most M&A deals missed targeted ROI due to a failure to successfully implement and achieve synergy targets.  Failing to properly blend companies combined with market & economic forces were the biggest reasons for the ROI shortfall.

Ironically, sagging market growth is both a leading cause for M&A deals to happen and for M&A deals to miss their ROI targets.

Portable Storage M&A Trends

The other shipping container market that Railbox Consulting offers services within is portable storage.  Even in the Portable Storage industry the two largest publicly traded companies (Pac-Van: GFN and Mobile Mini: MINI) are racing across the country to gobble up local and regional players to shore up growth.

Both companies are already feeling some of that M&A pain as Pac-Van has seen it’s parent company GFN’s stock price drop nearly 50% in value over the past six months.  Mini is also having issues, Moody’s recently downgraded their outlook on Mobile Mini to Negative (primarily due to the debt burden associated with a $400-million acquisition).

The two largest privately held portable storage providers (Algeco Scotsman and PODS) both have been very quiet on the acquisitions front over the past year or two.

PODS seems to have learned its lesson from becoming over-leveraged in the last economic boom.  Before the financial crisis, PODS was buying back franchisees.  This time around they flipped that model and sold out to the Ontario Teachers’ Pension Plan for a billion dollars and are again pushing the more conservative franchise model as a part of their growth plan.

Portable Storage Industry Fragmentation

Much like the shipping industry, the portable storage industry is highly fragmented with only two companies (Mobile Mini and PODS) achieving double digit market-share (this is by Railbox Consulting’s estimates, little public data exists on the full size of the portable storage industry) .

While the portable storage industry is still growing revenues, that industry is heavily reliant on oil/gas and construction industries for new unit deliveries.

Oil/gas is already diminishing, and if the logistics industry is truly an indicator of the overall economy, construction starts should slow in the coming years.  Leaving portable storage companies with few options for growth outside of M&A.

We’ve already seen this start.  Beyond Pac-Van and Mobile Mini buying up tuck-in acquisitions and liquid tank storage companies, Mobile Mini divested its wooden/modular office fleet to portable storage competitor Acton earlier this year.

It’s not unreasonable to assume that as market forces change demand for portable storage that larger M&A deals could take place in that field in 2016.

Will they pay off in 2017 and beyond is the question…

 

Disclosure – The author owns positions in one or more of the companies mentioned above and may continue to place trades over the coming months.  This article is not intended as financial guidance, but rather to provide information on the portable storage and shipping markets to our customers and followers.  Inquiries can be sent to info@railboxconsulting.com

 

Railbox Consulting is a multi-service logistics consulting service specializing in small to mid-sized intermodal and portable storage firms.  For more information, visit RailboxConsulting.com