Norbert’s takeover of TDG gives it more scale to compete against the giants of the 3PL market, but does it herald further consolidation in the market? Malory Davies and Johanna Parsons read the runes.
The upturn in trading conditions has opened the way for a new round of consolidation in the third party logistics market. The recession saw a significant number of closures among smaller
operators, but as the market grows there are new opportunities for those with the cash to pick up some bargains.
The problem that smaller operators, in particular, can face is how to fund an expansion in activity after using up cash reserves to get through the recession. Bibby has been notable for its activity in the acquisitions field this year but of course the big deal of the year has to be Norbert’s takeover of TDG.
The logic of the deal involving these particular operations has long been recognised – in fact it predates Dentressangle’s purchase of Christian Salvesen. In 2004, TDG chief executive David Garman approached the Salvesen board about a possible merger only to be rebuffed.
The deal also reflects the changes that have been taking place in third party logistics strategies over the past few years. At one time the dedicated distribution contract was seen as the primary goal for many 3PLs.
Contracts of this kind tend to require significant investment in trucks and sheds, and they require a level of return that will justify that investment.
And while there are undoubted attractions to dedicated contracts even now, there is a much greater need for 3PLs to be able to offer a range of network services. Dentressangle is a prime exponent of this with its European distribution networks. TDG has also been moving in this direction. Following the takeover by Douglas Bay Capital, the strategy was to sell off property where possible and focus on growth in sectors where much less capital would be tied up.
TDG chief Mike Branigan says: “The company has been transformed: the business model is refocused; the freight forwarding division has rapidly grown; the use of return-on-capital driven operational discipline has improved the overall efficiency of the operations.”
One example is the ground-breaking fourth party logistics contract with Corus, where TDG manages the entire transport operation hiring in sub-contractors to handle the actual transport rather than running its own fleet of vehicles.
It has also been investing in its international freight forwarding operations – an area that Dentressangle has been keen to expand. In November, it also finalised the takeover of Schneider Logistics International’s freight forwarding activity in the United States and China.
Dentressangle chief François Bertreau says of the TDG deal: “While retaining our financial flexibility this transaction consolidates our presence in each of our three sectors and considerably strengthens our freight forwarding business, allowing us to better meet the needs of our clients at international level. I am confident in our ability to integrate TDG quickly andeffectively, improving our services to clients and making the most of best practice on both sides.”
Following the buy out, 53 per cent of Norbert’s business will be road transport with 1.95 billion euros in revenues; 44 per cent of the business will be logistics, with 1.6 billion euros in revenues and nearly 6.5 million square metres of warehousing; and three per cent will come from freight forwarding, with revenues of 100 million euros.
Dentressangle reckons it will have the largest wholly-owned fleet in Europe with more than 8,000 tractor units and 11,000 trailers. TDG vehicles will be rebranded in the Norbert Dentressangle livery over the next two years.
Bertreau says the priority now will be to integrate TDG into the Norbert business as soon as possible. He does not anticipate any job losses in operations, although there may be a restructuring of the TDG headquarters in Manchester.
There will undoubtedly be speculation about the prospects for other logistics providers coming to market as major players seek to strengthen their competitive positions.
The TDG deal certainly gives Dentressangle more critical mass to compete against the other major players in the market.
But competition is growing ever more intense as companies seek not only to increase market share but also to improve return on capital. That pressure can be seen at Wincanton which has just completed a strategic review of the business. It said its immediate priorities were to focus on organic growth of the business, a significant reduction of the level of debt and to improve
profitability through a greater reduction in both overhead and operating costs.
Graeme McFaull has stepped down as chief executive of the group to be replaced by chief operating officer Eric Born. The group said McFaull would continue to have a consultative role to ensure a smooth handover to his successor.
Born took on the role of chief operating officer in April 2009. Wincanton said he “has extensive experience in managing turnarounds and growth in a number of industries including retail, airline catering and logistics. At Wincanton, he has predominantly focused on driving the successful turnaround of the German business.”
The leadership change was in line with succession plans, it said. Wincanton chairman David Edmonds said: “Graeme has been with Wincanton in a variety of roles for 16 years and, as chief executive for the past five years, he has played a major part in securing its growth into a major logistics company over that period. We wish him well in the future.”
Eric Born joined Wincanton in April 2009 from gategroup, where he was group senior vice president and president West/South Europe. He joined the Wincanton board in October of last year.
“On behalf of the board and the company I welcome Eric to his new role as chief executive as the company focuses on its strategic priorities of organic growth, reducing debt and improving the profitability of Wincanton.”
Boosting profitability is clearly a priority at DHL which has been set a target of increasing profits by some 15 per cent a year over the next five years by parent group Deutsche Post DHL. Having invested heavily to put together the giant logistics group, parent company Deutsche Post DHL is under pressure to give investors market-leading returns – and at the same time offset the decline in the postal market.
Group chief executive Frank Appel told a meeting of analysts in November: “Thanks to our products and services, we are already the leader in many areas. We now intend to set the pace in the industry in profitability terms as well.
“In recent years, we have laid the strongest foundation for this by introducing far-reaching efficiencyenhancing measures. In future years, our focus will be directed clearly at generating growth – in terms of both earnings and revenues.”
Key to this growth will be development of new products, tapping new customer groups, and targeting rapidly growing market sectors – notably life sciences and healthcare, technology and energy industries.
Kuehne + Nagel has also been focused on improving returns. In 2009, it saw sales fall by almost one fifth but managed to limit the decline in gross profit to just 6.2 per cent.
In May, chairman Klaus-Michael Kuehne told shareholders: “We have decided to continue our dual strategy of process optimisation and stringent cost management on one hand, and extending market shares by specific growth initiatives on the other.”
The strategy has seen sales bounce back producing a record operating profit in the third quarter.
Ceva has been focused on rebuilding margins, particularly in the freight management business, and for the third quarter reported record revenue and robust EBITDA performance. Chief executive John Pattullo said: “The actions we have taken to recover freight management margins and our ongoing focus on contract logistics profitability have resulted in a quarter three performance which gives us confidence that the full year will be in line with our expectations.”
Increasingly, the challenge to the established giants of the third party logistics market is coming from entrepreneurial independents like Stobart and Bibby.
Eddie Stobart has built up a huge public following with its trucking operations, but increasingly it is winning business with the major multiples. In May, for example, it started work on its £25m a year Tesco contract from a 528,000 sq ft Tesco chilled facility at Widnes. The new distribution centre is part of the Mersey Multimodal Gateway, a brown-field site development undertaken by Stobart Group, in partnership with Halton Borough Council.
As a result, Stobart Group saw underlying pre-tax profit rise 24.2 per cent to £15.4m in the first half on sales up 11.7 per cent to £243.7m. Chief executive Andrew Tinkler said: “Eddie Stobart has performed particularly well after contract wins with Tesco, A G Barr and others which have added volume and margin and there is further growth to come from these contracts.”
In June, Stobart Group has arranged a £100million, ten year loan to provide additional investment funds as well as repay existing bank debt.
Bibby Distribution has been particularly active in the takeover market. It’s recent takeover of TM Logistics was its third major acquisition of the year and added an additional £31m of business to its annual turnover.
In April, Bibby took over Biggleswade-based Taygroup, and in August, it bought a significant part of the English operations of haulage company MRS Distribution in a cash deal from the receivers.
Further expansion is on the cards, although chief executive Iain Speak is in no hurry to buy his way into continental markets. “Having ownership of companies in other European countries doesn’t really mean that you’ve got a European capability, and it can actually be to your detriment rather than to your advantage, for a number of reasons,” he says.
“I think if we were to move overseas with our core logistics offering, we’d probably be more likely to move to somewhere outside of Europe where we’d go for a different reason. We’d go to apply our growth model to a new territory. We wouldn’t go for operational synergies. “The other reason that we may go is to strengthen our forwarding capabilities. So we may move into new, let’s say territory or emerging territory with a forwarding capability that allows us to strengthen our own freight forwarding activity here, to link it up but it also allows us to dip our toes in the water.
Another of the large independents, NFT is also expanding. The temperature-controlled distribution specialist has invested another £2m in its Daventry site to take capacity to 20,000 pallets when it is complete in April 2011. When NFT commissioned the 120,000 ft sq chill store in November 2008, its aim was to provide a shared-user network to enhance its existing operational
capabilities. Earlier this year NFT reached break-even point on its initial £6m investment within two years. The facility has attracted brands such as Nom Dairy, Yoplait, Forza, and Gü.
Competitive times in pallet market
The pallet sector has been particularly competitive over the past year. UK Mail reported that in the half year to 30th September, sales in the pallets business were down 4.2 per cent on last year to £14.3m. In contrast, sales in the parcels division were up 1.5 per cent.
However, improved efficiency in pallet operations and reduced costs enabled it to increase the operating margin to 6.3 per cent and operating profit to £900,000 – a rise of 8.5 per cent. UK Mail says: “We see growth opportunities for this business as the economy recovers, driven by further focus on sectors of the distribution market which can benefit from this highly efficient method of palletised goods distribution.”
Palletline is targeting European growth and has brought in Phil Brady as international development manager. Brady says: “We have taken a fresh approach to the European scene, reviewing the market, identifying opportunities and establishing an innovative strategy based on best practice.
“Palletline already has a strong reputation for delivering quality services into the UK market, with a membership built on successful, independent distribution businesses. Our European expansion strategy makes the most of this, bringing on board quality European partners and continuing to develop Palletline London as the organisation’s European gateway.”
Pall-Ex is also expanding with a new hub covering the North of England and Scotland. The Northern Gateway, located on the site of Stalkers Transport near Carlisle, – aims to reduce the mileage travelled by depots operating in the north by saving time and fuel, reducing their carbon footprint and improving efficiency of collections and deliveries.
The new hub replaces the current site in Carlisle and allows Pall-Ex to offer additional warehouse space, a dedicated fleet and full load and groupage services at competitive ates. Chief executive Hilary Devey said: “The Northern Gateway provides improved operational efficiencies to Pall-Ex and will mean customers can now make next-day deliveries to towns such as Inverness.”
Pall-Ex has also launched a central billing system to make the invoice system easier and more efficient to use for its growing member network. Under the new system, Pall-Ex acts as the central biller and issues invoices for all work delivered between Pall-Ex members.
TDG is one of the longest-established companies in the UK logistics industry. It started life in 1922 as The General Lighterage Company moving products from ship to shore.
It did not become the Transport Development Group until 1957 when its growth as a major player in the UK haulage market began. It bought solid regional haulage and transport businesses and encouraged them to be entrepreneurial. Management was often left in the hands of the original owner.
A tiny management team at the centre (led for many years by Sir James Duncan) imposed a strict financial regime but interfered little in operational matters. The system had a number of advantages. There was a strong entrepreneurial spirit among the operating companies backed up by the financial strength of a large organisation. The name Transport Development Group was certainly appropriate.
By the mid-1980s the group had more than 100 operating companies and was turning over more than £600 million a year. Companies included Harris Distribution and Beck & Politzer.
However, there were disadvantages. There was no national branding. The individual companies were generally quite small making it difficult for them to bid for large national contracts. In addition, one TDG company could easily find itself bidding against another TDG company for the same business. The adoption of the juggler logo coincided with the start of consolidation of the businesses in the early 1990s.
Hedge fund Laxey Partners started building a stake in the business several years ago and by the time it launched a full bid in July 2008 it had built up a 22 per cent shareholding.