Logistics services firm C.H. Robinson paid a premium to win a bidding war in late September 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 run.
The Eden Prairie, Minn.-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 related 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.
C.H. Robinson announced it will pay $635 million for privately-held Phoenix, with 90 percent of the money paid in cash and 10 percent in newly issued Robinson stock. Phoenix had gross revenue of about $807 million during the fiscal year ended June 30. Its net revenue was about $161 million, with an adjusted operating income of $48 million.
The price is about 12.5 times trailing operating income. 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 pre-tax income, while the multiples of Panalpina and UTi are 10.1 and 7.8 respectively. Kuehne + Nagel is trading at 14.9 times.
“That’s one hell of a price to pay for it,” Richard Armstrong, chief executive officer of logistics consulting firm Armstrong & Associates, said. “But it’s a plum. It’s a very well-run company.”
Phoenix is a good company with solid management that is remaining in place and should provide future bottom-line value for Robinson, but not in the immediate term, David Ross, an analyst with investment banking firm Stifel Nicolaus, said.
In a conference call with analysts, company executives stressed Phoenix will give them the infrastructure to generate much more forwarding business as global trade improves. And customers should expect enhanced services from the integration because there is no cost-cutting strategy driving the deal.
Phoenix has generated 20 percent compound annual growth rates the last five years. Growth is down to the mid-single digits this year as the freight transportation sector endures the effects of the global slowdown.
“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 gets better that all the growth dynamics are still there,” Robinson Chief Financial Officer Chad Lindbloom 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.
The primary rationale for the deal 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 Robinson and Phoenix and the strong focus on technology to assess the best transport options and give customers visibility to their shipments, were also factors in the purchase decision, Wiehoff said.
“This is a move to make them really competitive with Expeditors, DHL, Kuehne +Nagel,” Armstrong said.
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.
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.
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.
Wiehoff said 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.
“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,” he said. “We don’t plan any meaningful people reductions, or cost savings on the personnel side.”
Wiehoff added the company will eventually take advantage of some redundancies to reduce costs.
“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 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,” but can augment that with greater strategic planning of their combined transportation requirements, Wiehoff said. – Eric Kulisch