DSV to buy UTi for $1.35 billion in cash; deal spells "game over" for struggling firm

For employees and customers of UTi Worldwide Inc., the uncertainty over its future as an independent entity appears to be over. For its shareholders, the misery of nearly a decade of the equity's massive underperformance also appears to be over. For the DSV Group, the Danish transport giant that has offered to buy the struggling contract logistics provider and freight forwarder for $1.35 billion in cash, the challenge of integrating an unprofitable company with nearly $4 billion in gross revenues is about to begin.

News of the purchase, approved by both boards and announced early this morning in the U.S., didn't come as a surprise. Both companies talked late last year about a deal but couldn't agree on a price. At the end of 2014, Long Beach, Calif.-based UTi's equity was trading at about $12 a share. As of yesterday's close, it was trading below $5 a share, about 34 percent below the agreed-upon purchase price of $7.01 a share. In mid-2006, UTi stock traded as high as $36 a share. The stock closed today at $7.13 a share, up $2.41 a share.

Given the dramatic decline in UTi's stock price this year, and confronting no immediate prospects for a recovery amidst weakness in global air and ocean traffic, it is doubtful UTi holders will oppose the deal; private equity firm P2 Capital Partners LLC, which owns 10.8 percent of UTi's common shares, said it supports the transaction.

The acquisition, scheduled to close in the first quarter of 2016, would create a US$13 billion company with 848 offices and 339 logistics facilities in 84 countries. About 61 percent of revenue would come from Europe, the Middle East, and North Africa; 17 percent from the Americas; 16 percent from the Asia-Pacific region, and 6 percent from sub-Saharan Africa, DSV said. The addition of UTi would give DSV, which generates more than half of its "net" revenue—revenue after the costs of purchased transportation—a deeper foothold in North America, a continent where it lacks a sizable presence, DSV said. About three-quarters of UTi's net revenue comes from the U.S., Asia, and South Africa.

DSV said the deal will significantly strengthen its air and ocean operations and will allow it to become a global contract logistics provider and expand into surface-transport activities beyond Europe. Contract logistics accounts for about $1.4 billion of UTi's annual revenue. UTi is strong in serving so-called vertical industries like health care, retail, and automotive, capabilities DSV said it would expand upon.

The $2.5-billion balance of UTi's total revenue comes from air and sea freight forwarding, a business that has long been commoditized and suffers from low yields and erratic demand. In an indication of the weakness in UTi's forwarding business, Benjamin J. Hartford, analyst for investment firm Robert W. Baird and Company Inc., assigned no value to the unit when evaluating the DSV offer. Hartford said in a note that other forwarders may benefit in the event UTi customers concerned about integration-related turmoil take their business elsewhere.

The global air and ocean freight business has been plagued for nearly 15 years by weak demand and overcapacity, with the oversupply being especially pronounced in ocean freight. The airport-to-airport airfreight business that UTi focuses on has been in secular decline for years, as cost-conscious businesses migrate to less-costly ocean freight services, and firms that need high-priority air express services use carriers like FedEx Corp., UPS Inc., and DHL Express, carriers that combine their transport and logistics functions and generally offer a faster and more convenient service.

In UTi's fiscal year 2016 second quarter, which ended July 31, net revenues from freight forwarding fell 21.8 percent from the prior-year period. Net revenues from contract logistics and distribution declined 7.4 percent year-over-year. The results were adversely affected by unfavorable currency fluctuations; the contract-logistics unit would have posted a small year-over-year gain had the currency impact been excluded.

UTi, considered a middle-of-the-pack international player, has hardly been immune from the weakening in international markets and the subpar sentiment it has triggered. A monthly index published by investment firm Stifel and consultancy Transport Intelligence that tracks the confidence firms have in the international transport and logistics business fell in September to its lowest level in more than two years. An index of the six-month outlook declined in September, resulting in a cumulative drop of 9.6 index points in the past four months, according to the survey.

UTi has also been dogged by internal issues, most notably a protracted and painful transition to a new enterprise-wide information system.

In recent years, DSV has made a number of large and small acquisitions, including the Dutch transport and logistics company Frans Maas in 2006 and Belgian company ABX Logistics in 2008. In its statement announcing the UTi deal, DSV said acquisitions are "an integral part" of its strategy, and that it has a "strong track record" of successfully integrating acquired companies.

Integrating merged companies in the transport and logistics business has historically been a dicey proposition. Firms must combine a broad array of activities and ensure their cultures mesh, all the while maintaining consistent service levels so their customers don't defect to eager rivals. The integration process is especially daunting when it involves companies from different countries, where laws and regulations may clash.

In a note today, Transport Intelligence said that "UTi always struggled to pull together its disparate businesses and the new-look DSV will face the same problem." However, the firm agreed that DSV has been "remarkably successful" at executing integrations with prior acquisitions, which it attributes to the tight control DSV senior management has over its operations.

"Although (DSV) will have to work hard to refashion UTi's various businesses, if it gets it right it will lay the foundations for substantial growth on a global scale," said John Manners-Bell, the consultancy's CEO. "The purchase is a risk, but a modest and calculated one."