C.H. Robinson paid a premium to win a bidding war for Chicago-based freight forwarder Phoenix International.
Company officials say Phoenix's growth potential as a high-quality operator easily justified the price and analysts said Robinson likely would realize a healthy return on investment in the long term.
The Minneapolis-based company is one of the largest and most profitable third-party logistics providers in the world, but its core market is in the United States and North America where it dominates the business of truck brokerage and provides other transportation management services. For two decades it has made incremental inroads into international freight management, to the point where it handled more than 260,000 TEUs of ocean freight and 50,000 metric tons of air freight in 2011. With the biggest acquisition in its history, it is now making an aggressive move to become a major player in international transportation.
On Tuesday, C.H. Robinson announced it will pay $635 million for privately-held Phoenix, with 90 percent of the money paid in cash from existing reserves and a revolving line of credit soon to be established with a bank, and 10 percent in newly issued Robinson stock. Phoenix had gross revenue of about $807 million during the fiscal year ended June 30. It's net revenue was about $161 million, with an adjusted operating income of $48 million.
The price is about 12.5 times trailing EBITDA (earnings before interest, taxes, depreciation and amortization). Comparable publicly traded companies in the logistics sector are trading at multiples of 10 or 11 times this profit metric. Expeditors International of Seattle is currently valued by investors at 10.4 times EBITDA, while the multiples of Panalpina and UTi are 10.1 and 7.8 respectively. Kuehne+Nagel is trading at 14.9 times EBITDA.
The price for Phoenix is also in line with C.H. Robinson's current valuation.
"That's one hell of a price to pay for it," Richard Armstrong, founder and chief executive officer of logistics consulting firm Armstrong & Associates of Stoughton, Wis., said. "But it's a plum. It's a very well-run company."
reported last summer that Phoenix was shopping itself for $500 million.
In an interview, David Ross, an analyst with Baltimore investment banking firm Stifel Nicolaus, said C.H. Robinson paid full retail price for Phoenix.
"Normally, if you're trading at 12.4 times EBITDA like C.H. Robinson, you'd like to buy something for less than that so it's immediately accretive" to earnings, he said.
In other words, C.H. Robinson's earnings per share may not increase much when all the costs of the transaction are included even though Phoenix is a profitable company.
Robinson officials said the deal, which is expected to close in the fourth quarter after normal regulatory reviews, will be "mildly accretive" to earnings in the first year.
Phoenix is a good company with solid management that is remaining in place and could provide future bottom-line value for Robinson, but not in the immediate term, Ross said.
In a conference call with analysts Tuesday morning, company executives stressed Phoenix will give them the infrastructure to generate much more forwarding business as global trade improves. And customers should expect to see enhanced services from the integration because there is no cost-cutting strategy driving the deal, they said.
Phoenix, founded in 1979 by Bill McInerney, has generated 20 percent compound annual growth rates the last five years. Growth is down to the mid-single digits this year as the company, along with the rest of the freight transportation sector, has endured the effects of the slowdown in global economic activity.
"But we take a long-term view of things and feel it’s still a premium asset. We believe all the core things are still in place that when the market does shift or get better that all the growth dynamics are still there," Chad Lindbloom, Robinson's chief financial officer, said.
Chairman and CEO John Wiehoff said Phoenix has continued to take market share even as its earnings growth has slowed. Robinson is comfortable with the price it paid because the valuation is similar to Robinson's and Phoenix creates the opportunity for new premium service offerings, he added.
Armstrong concurred the timing of the acquisition is good because "when the global economies recover and hit their stride again they will be able to get a significant amount of new business."
Robinson, which tends to be very conservative when it comes to buying other companies and for the most part has grown organically in the international arena, intends to use Phoenix as a platform to significantly expand its freight forwarding and customs brokerage business, according to company officials and analysts.
The primary rationale for the deal given by Wiehoff is that Phoenix gives Robinson the network scale and density in major trade lanes, along with greater expertise, to support shippers. It also creates the opportunity to develop deeper relationships with customers by meeting their domestic and international transportation needs.
The cultural fit between C.H. Robinson and Phoenix, the strong focus on technology to assess the best transport options and give customers visibility to their shipments, and the complimentary sales opportunities were also factors in the purchase decision, he said.
"This is a move to make them really competitive with Expeditors, DHL, Kuehne+Nagel," Armstrong said, naming some of the giants in the forwarding industry.
C.H. Robinson is already the fifth largest global third-party logistics provider by revenue, with $10.3 billion in business last year. It has grown significantly in Europe, but also has offices in Asia. Earlier this month, C.H. Robinson also agreed to buy a Polish forwarder, Apreo Logistics, that provides a wide variety of trucking, warehousing and other services.
Among Robinson's top international offerings is a managed transportation management system that combines optimization software for multi-modal transportation strategy and execution with specialists in central offices around the world that monitor shipments for a customer's global supply chain and intervene as necessary to ensure delivery schedules are met. Under this "control tower" approach, C.H. Robinson acts as a de facto lead logistics provider arranging dispatch with carriers.
In July, Bryan Foe was named president of C.H. Robinson Europe and this year the company also opened an office in Rotterdam focused on temperature-controlled transportation.
Phoenix is a large ocean freight consolidator that primarily handles imports to the United States from Asia, booking space on container lines at wholesale prices. In 2011, Phoenix transported 250,000 TEUs. Of that amount, 72 percent, or 180,000 TEUs, was on the inbound transpacific trade lane.
The combined volumes of C.H. Robinson and Phoenix would make C.H. Robinson the 10th largest ocean freight forwarder.
Ocean forwarding represents 60 percent of Phoenix's business. The rest of its revenue is evenly split between air freight consolidation and customs clearance services. Phoenix has 2,000 employees located in 76 offices in 15 countries, including in Europe.
Phoenix has a diverse customer base (15,000 total), with the top 10 customers making up less than 10 percent of its business, Lindbloom said.
It makes more money than C.H. Robinson's forwarding division, which had net revenue of $114 million in the past year, according to Stifel Nicolaus research.
Wiehoff said on the teleconference that Phoenix overlaps Robinson's biggest trade lane to a large degree, but the size of the transpacific market and expected trade growth in the near future diminishes the risk of fighting for the same customers.
That growth potential is the reason C.H. Robinson plans to retain Phoenix staff.
"It's very much a growth, synergy strategy of trying to cross-sell and take market share and expand the relationships that we have today," Wiehoff said. "We don't plan any meaningful people reductions, or cost savings on the personnel side. Our plan is that when we put the networks together that we believe we can grow our businesses without adding proportionate costs for some period of time."
He added the company will eventually take advantage of some redundancies to reduce costs, without going into detail.
Armstrong said one possibility would be to consolidate C.H. Robinson's customs brokerage office in Chicago, which is a few miles from the Phoenix headquarters.
"In the short term we’re going to be very focused on making certain that both of our collective customers continue to experience the same great service, and that if anything we bring more to them from a relationship standpoint," Wiehoff said.
"It’s not just a market aggregation, a market roll-up," he explained. "It’s looking for the absolute right fit with people and culture and then being very deliberate about how we sew the systems together to make sure we don’t have any business interruption and that we really capture the best of both capabilities rather than just forcing one side of the business into the other side."
The two companies' compatibility stems in part from the fact that both cater to midsized clients.
About 30 percent of Robinson's customers use a service, such as global forwarding, besides traditional truckload, less-than-truckload and intermodal carrier management. Wiehoff said the deal further enables domestic customers to get exposed to Robinson's international services or for existing forwarding customers to let Robinson manage more of their shipping routes.
"We know we have a very small percentage of our customers' spend. Through greater market share penetration of both domestic and international, and then combining those relationships together can give greater insight into network analysis, supply chain visibility, mode selection and all the rest of that that comes with greater involvement in all the transportation offerings," Wiehoff said.
He told analysts that Phoenix CEO Stephane Rambaud will head up the combined international freight forwarding operations, including customs brokerage.
Robinson's international division has been overseen in pieces by several executives on an interim basis following the 2010 death of Jeff Scovill, spokesman Mike Wilken said. Those duties will now roll back up under one position.
Armstrong credited Rambaud, who succeeded McInerney as CEO in 2007, for building Phoenix to its current level and said he will be a major asset for Robinson. According to Armstrong, Phoenix's leaders several years ago aspired to bring sales up to about $1 billion and then offer shares to the public in the stock market.
(For more details about trends and developments in the third-party logistics space, read the American Shipper September issue cover story.) - Eric Kulisch