eutsche Post's collection of designer label logistics service providers is set to be crowned with the acquisition of United Kingdom rival Exel. By paying $6.7 billion in cash (about 72 percent of the acquisition price) and the balance in new shares, the German mail group will truly be creating a global logistics giant.
It is a collection that already features such well-known main-street brands as Danzas, DHL, AEI and ASG. How will Exel fit into this portfolio?
One clear sign is in the announcement by Deutsche Post that the new outfit will be headquartered, not in Germany, but in the United Kingdom, at Exel's current headquarters in Bracknell. The operation is to be headed by Exel's chief executive, John Allan, who will also be charged with overseeing the integration process.
Deutsche Post, it would seem, wants to model its new lines very much in the image and style of Exel, although it is believed "DHL" will be the predominant brand label. More importantly, though, the new logistics venture will be top dog in Europe, the Americas and Asia.
Now, while everyone has been watching Europe's national airlines move through their slow consolidation dance either through mergers or through grand alliances, the logistics sector is preparing to witness the two largest buyers of freight transport services in Europe combine into one. Other combinations are all but certain to follow.
Merging Exel
Exel itself was a creation of the merger of two British companies, Ocean Group and Exel, just five years ago, and its very identity is a testament to the consolidation wave that has washed over the forwarding industry.
Exel essentially combined the freight forwarding operations of Ocean, known more familiarly perhaps through the name MSAS Global Logistics, with Exel's predominantly domestic contract logistics activities. The combined operation was acknowledged as the world's largest contract logistics company.
MSAS Global Logistics had only a year earlier re-branded from its former moniker of MSAS Cargo International, at the same time announcing the continuation of a fairly aggressive strategy of growth by acquisition across all markets.
It had already scooped up such names as Intexo in Holland, the Mercury Group in the U.K. and Dutch Air Plus in the Netherlands.
It was also on the move in the North American market through what it charmingly termed "organic acquisition," namely the purchase of its long-term partners. Folded in were companies such as domestic forwarder Skyking Freight Systems, fashion mover Airlink and customs broker A.W. Fenton.
This so-called "eat lunch or be lunch" strategy enabled MSAS to boost operating profits in the U.S. by 30 percent in a single year. North America, however, has proved more difficult in recent times for Exel.
Even back then, MSAS was the subject of takeover rumors, with FedEx once seen as the likely predator.
More recently, Exel's acquisitions have continued in Europe, Asia and South Africa, but have been aimed more at strengthening the company's position in ocean forwarding. It has acquired Eagle Freight in South Africa, All Cargo Logistics in Austria and United States Consolidations in North America.
Most notably, in contract logistics, Exel last year made the breathtaking buy-out of U.K. domestic rival Tibbett & Brittten for nearly $600 million. It was a move that certainly caused a sharp intake of breath among investors, as Exel's stock price fell over worries that the firm had overpaid on the deal.
Expanding Giant
But Exel appears only to have gone from strength to strength. Last year, overall revenue for the company grew 25 percent to $11.5 billion. More significantly, operating profit rose 25 percent to $325 million to provide an operating margin of 2.9 percent. Air freight forwarding revenue topped $3 billion.
No wonder executives at Deutsche Post were training their binoculars across the English Channel. Exel's split between contract logistics and freight management operations now lies roughly 60:40 in favor of the contract logistics business, with the acquisition of Tibbett & Britten tipping the scales.
Contract logistics has enjoyed higher profits and profit margins for the company compared with freight management, but that gap has closed over the last year.
Freight management margins have improved on increased air volume, up by 18 percent. Europe was particularly strong, with signs also that the company was coming to grips with its problematic U.S. operations. Asia-Pacific revenue climbed 26 percent.
In fact, for Exel's freight management operations, the U.K. only represents 10 percent of its business, with continental Europe and Africa representing 26 percent of revenue, and the Americas and Asia Pacific each accounting for about 30 percent.
Freight management operations now account for more than four million air freight shipments a year for Exel, adding up to over 600,000 tonnes. It has seen particularly strong growth in the last year, with the Americas proving to be its ace in the hole, with growth rates in excess of 23 percent. The European air freight market grew 16 percent for the company with Asia Pacific up 18 percent. That provided an average global growth by air weight of 18 percent.
In North America, Exel's air cargo business accounts for around $540 million in revenues. It was problems with its U.S. domestic freight management business that caused Exel to undertake a restructuring program last year. This resulted in combining a previous six operating units into just two divisions: Global Freight Management (air and sea) and Domestic Freight Management (road and rail).
Among the questions now being asked of the bean counters in Bonn and in Bracknell will be which of the two companies are the stronger in the various global markets, particularly in the keenly fought air freight sector. It is also not only about sheer weight of business, but also about the individual market perception of these two substantial players.
In a recent shipper survey carried out by U.K.-based Transport Intelligence, U.S. shippers put Exel way ahead of the field with 20 percent of respondents giving it a strong approval rating, while DHL/Danzas lagged behind at around 12 percentage points.
But it is on the global catwalk where size and perception matter most.
Deutsche Post's frontline operation of DHL Danzas Air & Ocean, as the market leader in air freight forwarding, already accounts for a 6.4 percent market share, with fourth place Exel (after UPS and Panalpina) claiming a 4.7 percent market share. Dominant though the new duo might be, they will still only account for just over 10 percent of the business.
… Briefly
Cargo traffic for European carriers edged up 1.1 percent in August, according to the Association of European Airlines, as a 1.5 percent decline on the North Atlantic offset 6.2 percent growth on Asia routes. The overall business for the scheduled airlines was up 2.1 percent in the first eight months of the year. ... SAS Cargo, opening a new business line in cargo general sales agency work, took over the freight activities of Sterling, formerly Maersk Air Cargo, including the GSA business representing eight airlines in the Nordic and Baltic countries. … TNT Express will take on two 737-300 freighters from GE Capital Aviation Services to replace two sub-contracted aircraft in its European network. ... Finnair will add two MD-11 passenger aircraft in coming months and will add them to its growing service to Asia. … Cargo traffic at Air France-KLM grew 3.2 percent in August, less than half the capacity growth of 7 percent during what the company called "a persistently challenging environment." … Kuehne + Nagel opened a 72,000-square-foot logistics and handling facility in Norrkoping, Sweden. … British home improvement goods wholesaler PJH Group named APL Logistics to manage its international supply chain. … Cargolux opened a company office at the Zurich Airport, where the airline operates truck connections to its hub in Luxembourg, and named Gestao de Servicos Aereos as its general sales agent in Portugal at the Lisbon and Porto airports. … France's Vatry International Airport says it handled more than 24,000 tonnes of cargo in the first eight months of 2005, about 5,000 tonnes more than it saw in all of 2004. Vatry started work on a 29,000-square-foot building almost double the size of the industrial airport's existing cargo facility. … British Airways World Cargo appointed Airline Services GSA its cargo general sales agent for Finland. … Martinair Cargo started weekly MD-11 freighter service between Amsterdam and Khartoum, the capital of Sudan. ... Britain's Institute of Exports named Select Airline Management its 'New Exporter of the Year."
