Friday 30th Sep 2016 - Logistics Manager

A DP / Exel merger – who will benefit?

Speculation about whether Deutsche Post was poised to launch a formal £3.6Bn bid for UK logistics group Exel was reaching fever pitch as Logistics Manager went to press. National press reports about Exel agreeing to open its books to Deutsche Post were followed by talk of a possible reactive approach by US postal group UPS. But, if the deal does go through and Deutsche Post takes over Exel, what will the consequences be for the logistics industry?

According to John Lawson, a transport analyst at Investec Securities, the takeover might be to the benefit of smaller players as end-users become frustrated by the perceived complacency and lack of flexibility displayed by the “premiership” 3PLs. “There is probably a right size to be, and this might make other players think about their strategy and try to become a bit bigger so further consolidation in the market is likely,” says Lawson.

But he stresses that if the takeover goes ahead the enlarged group could offer customers increased productivity and a better service so there are two ways of looking at how end-users might view the situation. On turnover alone the group would have about 4-5% market share, believes Lawson.

While many analysts are unable to comment on the ramifications of a takeover of Exel by Deutsche Post, one says it could mean that more ‘first division’ logistics players are considered when it comes to tendering for major contracts.

However, he believes that competition on a global basis would be reduced as Exel has a “pretty rare” set of skills which other big names like Christian Salvesen, TDG and Wincanton struggle to match. “Although there will be one fewer big player in the market the logistics industry – which is incredibly fragmented – will not suddenly become a competition-free zone as a result of this transaction.”

He adds that a takeover by Deutsche Post would enhance the logistics offerings of both companies. Another analyst believes that there will be some fall-out as a result, with some customers using it as an opportunity to “screw down” prices or by moving business elsewhere.

“It only takes a little bit of fall-out to have an impact on smaller players but these smaller players in turn will be gobbled up as part of ongoing consolidation,” said the analyst.

Mark McVicar, an analyst from Dresdner Kleinwort Wasserstein, disagrees with the idea that the takeover could lead some customers to switch contractor. He says that if the deal goes ahead and is carried out on an agreed basis than both management teams would do everything in their power to hold on to all Exel’s existing business and contracts.

“If the same thing happens as it did with Tibbett & Britten (T&B) then the amount of business leaks and contracts cancelled or not renewed will be pretty low,” says McVicar. The deal would be expected to improve the overall service offerings of both companies, he adds. “This is going to make Exel a strong competitor and it will be able to offer customers services from DHL Express, for example, while still offering the management of a warehouse in Wigan.”

McVicar says that Deutsche Post has been trying to build up its presence in North America and Europe in forwarding, express parcels and contract logistics for several years. Acquiring Exel will fill in the gaps by giving it a stronger grasp on the contract logistics market in Europe. “It’s all about service and geography,” says McVicar.

And investment bank Credit Suisse First Boston (CSFB) agrees with that analysis. “We think there are clear scale advantages to be had in freight forwarding and suspect Exel’s logistics know-how would be a real positive for the Deutsche Post logistics operation,” according to analysts at CSFB. “Strategically, then, the deal would make sense.”

But could any possible takeover be subject to scrutiny from Competition Commissions in the UK, Germany, EU or the US?

McVicar thinks that although Competition Commissions in the US and EU will be called to give their views there will not be a problem. In forwarding the combined companies only have about a 15% market share of the sector and the contract logistics industry is very fragmented anyway, says McVicar.

ING Wholesale Banking also sees no significant competition issues for the DP/Exel combination. In contract logistics ING estimates that DP/Exel would have a combined global market share of 5.4% compared with TNT’s 2.4%. Exel is already global number one and TNT remains number two.

ING believes that the only potential issue is in the UK, where Exel is estimated to have a 30% market share. However, ING believes that Deutsche Post does not have a significant market share in the UK. And in Germany, where Deutsche Post has a large share, Exel does not – their combined market share in Germany would be roughly half the size of Exel’s UK market share.

In freight management ING does not envisage any problems. The combined group would become global number one in airfreight and seafreight. DP/Exel would hold 11.1% of the airfreight market and 8% of seafreight. This would translate into a total freight management market share of 3%, according to ING.

It believes that the deal would be “potentially transformative” for Deutsche Post which is currently trying to expand its overseas operations before the loss of its monopoly of the German letters market in 2007. And by combining Exel with Deutsche Post’s UK parcels operation DHL it would create a more powerful rival to Royal Mail when full liberalisation of the postal market takes place in the UK in January. So far the omens look good that it will succeed in putting in a bid. Exel chief executive John Allan has reportedly been told that he would run the combined business and have a seat on Deutsche Post’s management board.

But could an approach by UPS scupper the deal? Well, ING says that if the price for Exel is 1200p a share, a UPS counter-bid is unlikely. “ING’s analysis suggests the value (at 1200p) is now beyond UPS’s sensible limit,” according to an ING report on the deal. The company thinks that the strategic and financial fit of Exel with Deutsche Post is tighter than with that of UPS.

McVicar says that UPS has “very deep pockets” and likes being number one but it is a conservative company and might avoid getting involved in a bidding war from such a great distance.

Whoever ends up buying Exel would gain a company that lifted sales by almost half in 2004 after the acquisition of UK rival T&B and add a range of customers including DaimlerChrysler and Hewlett-Packard Co. Synergy effects from taking over Exel could amount to at least Euro 150M to 200M.

Investec’s Lawson feels that there will not be a fundamental “change to the logistics landscape overnight” whoever takes Exel over following a successful bid for the company.

Exel’s rivals, smaller logistics firms, shareholders and analysts will all be waiting to see if that is true.