Logistics sector braces itself to ride PE/M&A wave

Top logistics and Private Equity CEOs congregated at Supply Chain Leadership Council’s ‘Private Equity, Mergers & Acquisitions in Logistics Summit’ here on March 4 to discuss the future of private equity investments in India’s logistics sector and the imminent M&A wave that is expected to swamp this sector in the coming months.

The conference attracted over 100 private equity investors, logistics companies’ promoters and CEOs, investment bankers and deal makers.

Speakers at this conference included Mr Manish Saigal, Executive Director and Head of Transportation & Logistics of KPMG, Mr Dinesh Tiwari, Executive Director of JP Morgan, Mr Chetan Dikshit, Director of Rothschild, Mr Sumir Chadha, MD of Sequoia Capital, Mr Vishal Sharma, MD & CEO of Tuscan Ventures, Mr Rahul Shah, Partner & Director of Investments, Aditya Birla Private Equity, Mr K. Mukundan, Director of UTI Infrastructure PE fund, Mr Prasad Gadkari, Principal, IDFC PE, Mr Vikram Uttam Singh, Executive Director and Head of Markets & Private Equity, KPMG, Mr Ashit Desai, Executive Director of Allcargo, Mr Shankar Chatterjee, MD (India and South Asia) of Bertling Logistics, Mr Ajit Jangle, MD & CEO, Toll Logistics India, Mr Puneet Agrawal, Director, Delhi Assam Roadways and Mr Gautam Dembla, Director (Operations) of Spear Logistics.

Last year’s $ 26-billion all-cash acquisition of the Texas-based railroad company, Burlington Northern Santa Fe, by arguably the world’s most famous and successful investor, Mr Warren Buffet, fixed the wandering investors’ eyes on to the ‘next big thing’—logistics.

"Transportation is fundamental. And there’s lots of money to be made", Mr Buffet had observed after the acquisition.

With almost 600 reported deals representing more than $ 79 billion in aggregate transaction value since 2005, the transportation industry has seen significant PE, mergers and acquisitions transaction activity. According to Preqin, a consultancy for alternative investments, about 258 PE firms, or about 5 per cent of firms globally, are targeting investments in logistics.

Nobody doubts that the deal activity has picked up significantly in India since last year and is expected to edge higher towards the end of this year. According to VCCircle, in January this year, there were as many as 29 domestic deals in India worth $ 2,303 million compared to 14 transactions worth $ 589 million in January 2009. Telecom, logistics and banking, and finance and insurance were the most targeted sectors for investments. "It will probably not touch 2007 levels but it will certainly approach it", opined Mr Saigal at the summit.

The logistics sector, which is a collection of several sub-sectors ranging from ocean shipping and ports to warehousing and distribution, express courier to supply chain consulting, is significantly diverse with inherently different growth and profitability levels. The sector is highly fragmented with few players controlling more than 10 per cent of the markets.

For instance, C.H. Robinson, the biggest player in the $ 120 billion third-party logistics market with revenue of $ 8.59 billion in 2008, has less than 6 per cent of the market. The lessons of the last few quarters have taught sector participants the world across and in India that it is not sinful to sell. In fact, often and increasingly so, that might be the only way out to survive or salvage value in their battered businesses.

In his speech, Mr Saigal commented, "Deal activity in logistics had not been significantly hit by the slowdown in 2009 over 2008, though ticket sizes had dipped from an average of $ 46 million to $ 27 million. A strong bounce back in M&A is expected in the current fiscal".

Mr Desai explained, "Acquisitions are a critical part of Allcargo’s growth strategy". He added, "Allcargo has successfully acquired and integrated several companies including multiple acquisitions abroad while multiple others were being negotiated".

He predicted that the industry was on the verge of a consolidation wave and that was great news for all stakeholders involved. As advise to his peers, Mr Desai observed, "While doing acquisitions, one must have sufficient management bandwidth, one must only buy at reasonable price and be prepared to walk away if the deal doesn't ‘feel’ good". He also cautioned against "over-Indianisation" of acquired companies.

Mr Jangle disclosed that Toll was keen to acquire multiple logistics companies in India, provided the fit and price was right.

Mr Chatterjee echoed this intention as being his own too.

Mr Sharma said that the last few months had changed the fundamentals of private equity investing and that India was no different. Investment models would increasingly lean towards performance-based valuations and structures that would give funds several options to cut losses at every stage of an investment.

He also mentioned that new models of investing, where mechanisms would be in place in the hands of the investors to be able to manage risks and execution, would evolve. Accordingly, funds may actively have to help incubating companies with professionals in attractive areas where investment opportunities are not available. Also, large sector agnostic funds (which are not sector-specific) will increasingly co-invest with smaller, sector-focused and operationally-driven funds to have a greater handle on their exposures.

Mr Singh advised logistics promoters to strictly evaluate their PE readiness and chance for success (according to him, only 3 deals out of 100 actually conclude) on key parameters of scale, management bandwidth, transparency and exit potential before jumping on the PE bandwagon.

The conference was organised by the Supply Chain Leadership Council. Supply Chain Leadership Council™ is dedicated to developing the largest and the most active community of supply chain professionals in India. Supply Chain Leadership Council is focused on delivering forums with bold and well-timed themes, dedicated to the logistics and supply chain sector, thereby providing an able platform for meaningful interaction within the industry as well as for consolidating the industry’s opinions and concerns towards policy-makers.

"The mood and the buzz at the conference were unambiguously evident of that the deal makers and promoters mean business and the cheque books are back in the front pockets. The Indian logistics sector seems to have turned one more corner", observed Ms Gautami Seksaria, Founder and Partner, Supply Chain Leadership Council.

Source : Exim News Service - MUMBAI, March 9