DSV well positioned to manage this month’s Panalpina takeover

Despite market slowdown, Danish freight and logistics group’s results last week show its ‘house is in order’ ahead of major merger with Swiss forwarder, expected around 19 August, says analyst Jefferies.

The latest financial results of Danish freight and logistics group DSV, published last week, show that it is well positioned to manage its takeover of Swiss forwarder Panalpina, expected around 19 August, despite this year’s weakening freight markets, according to logistics investment analyst Jefferies.

Commenting on DSV’s strong second-quarter (2Q19) performance, Jefferies commented: “2Q19 results confirm DSV’s house is in order ahead of the takeover of Panalpina, reflecting market share gains in weakening freight markets.”

It said underlying EBIT growth slowed to 4% in 2Q19, due to softer transport markets, particularly in air freight, and fewer working days in road freight, resulting in EBIT growth of 9% for the first half of 2019.

It said that EBI performance was well ahead of fellow major freight and logistics companies such as Kuehne + Nagel (6%) and Panalpina (-5%).

It said the “next catalyst” was the completion of the Panalpina takeover, adding: “The takeover of Panalpina is expected to be completed around 19 August, followed by more guidance on the integration process and expected synergies.”

Jefferies highlighted that the takeover price for Panalpina “depends on DSV’s share price at closing, as DSV is offering 2.375 DSV shares for each Panalpina share, now valuing Panalpina at CHF226 per share, resulting in an enterprise value of DKK 35.5bn and a takeover multiple of 37.3x FY20E EBIT”.

Despite the expected increase in the takeover price for Panalpina, resulting from the increase in DSV’s share price since it made its offer, Jefferies still believes it offers attractive synergies for DSV.

“We estimate value accretion in the range of 15%-25%, as economies of scale in freight forwarding drive significant operational and commercial benefits,” it noted. “We estimate synergies in a range of DKK 1.5bn-DKK 3.0bn from cross-selling and integrating duplicate sales and back offices, with >50% of Panalpina’s workforce estimated to overlap with DSV’s,”, noting that Panalpina’s personnel expenses amounted to over DKK 6 billion in 2018.

Nevertheless, in the short term, it has lowered its estimates for DSV’s performance “by 3% after resetting Panalpina expectations by 24% following weaker than expected 1H19 results, reflecting increasing competition ahead of the DSV takeover, and substantially lower volumes in the automotive sector, negatively impacting air freight and logistics.

“Note that the impact on our DSV estimates is relatively limited, as the key drivers are economies of scale and synergies.”

On its expectations for the merger and integration, it noted: “DSV is the best-in-class freight forwarder, with the (industry’s) highest yields in air and sea freight, resulting in a FY18 EBIT margin of 10%, double the industry average. It also enjoys strong profitability in Road and Solutions, ahead of peers.

“With the planned DKK 35bn takeover of Panalpina, DSV will become the world’s fourth largest freight forwarder, with top-3 positions in air, sea and road freight. Economies of scale in freight forwarding drive significant operational and commercial benefits.

“Our base-case scenario assumes cost synergies of DKK 2.4bn, circa 2.0% of combined revenues, lifting Panalpina’s FY22E EBIT margin from 3.0% stand-alone to 8.0% integrated with DSV.”

Source: Lloyd´s