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| 3 minutes read

How can Private Equity earn superior returns in Transport & Logistics? (Part 1 of 3)

PE house interest in the Transport & Logistics (T&L) sector is growing significantly, and our key private equity clients are increasingly reaching out to understand how to achieve superior returns in this space.

The T&L sector’s traditional appeal is its steady cash flows, and it is now also a service with rapidly increasing demand, driven in part by the spike in eCommerce activity and the shift in spend from services and experiences to products over the past two years. While this was, of course, catalysed by the pandemic, consumers’ shift to online shopping was a trend already well under way, highlighted in our recent Changing Consumer Priorities research that also suggests the sharp uptick in eCommerce sparked by COVID-19 may well stick for the long term. The digital retailers experiencing a boom in “click to buys” will only continue to thrive with T&L partners powering the delivery of those purchases.  

However, this sector is also historically low-margin and exposed to the economic cycle, so PE houses require a well-crafted, multi-step, synergy-driven strategy for success. 

Total and average deal value is on the rise

With interest in the sector rising, investors seeking to buy their way into this industry are frequently outbid in asset auctions by established players whose synergies justify premium bids. Larger, well-scaled companies that can serve as a good T&L platform for future growth may command double-digit EBITDA multiples, and our PE clients often decide that they can’t justify such a high price.

Perhaps on a single acquisition, the numbers don’t stack up. However, that calculation changes when planning a number of steps ahead. If a series of acquisitions can be made that are then successfully integrated operationally and commercially, they can deliver the cost and revenue synergy that delivers positive returns.

Where to start: Platform acquisition and three strategies to consider

The initial platform acquisition – a logistics company with good management, good systems, and headroom to grow – will command a price premium, often at a double-digit EBITDA multiple. This represents the “price of entry” to the market.

After this, focus should turn to building on the platform with additional acquisitions. This series will explore three successful approaches that can allow PE houses to make superior returns. As additional acquisitions are integrated into the platform, they can deliver value through cost synergy and enhanced commercial reach and capability, while the profits of every entity acquired rises in value to the superior EBITDA multiple of the combined company.

STRATEGY #1: Platform acquisition + multiple small bolt-ons

T&L remains a highly fragmented sector with a long “tail” of sub-scale companies. This particular strategy leverages that fact. Firstly, the PE house pays a high multiple for a reasonably well–scaled, well-managed “platform” acquisition that already has good IT systems and processes, among other operational competitive advantages. It then buys and integrates a series of small “bolt-on” acquisitions, typically at lower multiples.

We have seen this strategy play out successfully in recent times, with one PE house in particular acquiring a single chilled warehouse more than 10 years ago, and then proceeding to complete over 50 acquisitions over the years to build one of the largest chilled logistics companies in the world, with over $1bn in revenue across 15 countries. They now acquire and integrate multiple additional bolt-ons each year – acquisitions have become part of their “business as usual” DNA.

Another PE house has demonstrated a successful track record of buying up big-box logistics assets and integrating them into fully scaled and networked entities. At that point, they sell the integrated company to an institutional investor, and then begin the buy-and-build strategy all over again in a different geography or a different logistics service line.

Others have achieved scale and success by acquiring a logistics franchisor, and then buying up the franchisees who provide the franchisor’s services in specific localities.

Many of the sub-scale “bolt-on” acquisitions can be bought for single-digit EBITDA multiples and the post-acquisition integration process is usually straightforward. Once integrated, not only is there cost synergy, but the bolt-ons’ profits are upgraded in value to the platform company’s EBITDA multiple.

Of course, a critical opening move is the initial upfront pay-to-play but then, as this approach has shown, a number of routes to rapid scaling and value creation can then be executed over the coming years.

In our second post of this series, we will explore the second strategy of fewer, larger acquisitions and how this can accelerate the pace of growth, albeit with a potentially higher price tag.


The opinions expressed in this article are those of the author(s) and do not necessarily reflect the views of AlixPartners, LLP, its affiliates, or any of its or their respective other professionals or clients. This article is not intended to, and should not be used as, any form of advice and neither the authors of this article, nor AlixPartners, LLP nor its affiliates, advise, by way of this article, any party to take any actions, or refrain from taking any actions, as a result of the opinions presented in this article.

Tags

private equity, transport, logistics, supply chain, manda

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