Transportation and logistics deals insights: Midyear 2020
T&L sub-sector analysis
The COVID-19 pandemic has triggered a global economic recession. The Transportation and Logistics (T&L) industry has been impacted by international travel restrictions, declines in oil demand, and disruptions to operations and supply chains amid government-mandated lockdowns. Despite a decline in M&A activity during H1 2020, average deal size grew over H1 2019.
Investors are expected to remain cautious considering the current global economic scenario. Corporations will continue to focus on their liquidity position, which should spark additional divestments.
“COVID-19 has proven to be a significant disruptor to the T&L sector, also accelerating preexisting tech and consolidation trends. We expect these trends to continue and to drive significant deal activity in the remainder of the year.”
High level trends and highlights
H1 2020 transaction volume and value declined 26% and 57%, respectively, from the peak M&A activity recorded in H2 2019. Volatility in T&L deals activity remains as a result of the economic impact of the ongoing COVID-19 crisis.
The sector recorded one megadeal in H1 2020, in comparison with no megadeals reported in H1 2019, which has led to a healthy average H1 2020 transaction size despite declines in M&A volume.
Average deal size increased by 9% in H1 2020 in comparison with H1 2019 and reached $377.1 million.
The shipping subsector was the only subsector to post a deal value increase in H1 2020, growing by 29% to $10.4 billion from H1 2019. Despite a 25% decline in transaction volume, three shipping deals recorded values of at least $1 billion, which led average shipping deal size to reach $493.9 million.
Passenger air M&A activity was sluggish at the start of the year with only two deals totaling $2.5 billion reported in Q1. However, the subsector recovered in Q2 with nine deals worth $7.1 billion, including the only megadeal announced in the first half of 2020: Germany’s Economic Stabilization Fund pending acquisition of Deutsche Lufthansa AG’s assets for $5.1 billion.
M&A volume in the logistics subsector remained unchanged in H1 2020 with 37 announced transactions. The other T&L subsector posted the largest drop in deal value, a 97% decline, as only one deal was announced in H1 2020.
Within-border deals continue to lead M&A activity and constituted 74% of transaction value in H1 2020. Restrictions on exports and travel, supply chain disruptions due to government-imposed lockdowns, depressed demand for energy and metals commodities, and lingering trade uncertainties are key factors driving within-border investments. Seven of the 10 largest deals announced in H1 2020 were domestic transactions.
The largest cross-border deal announced in H1 2020 was the pending acquisition of an 81.1% interest in Brisa Auto-Estradas de Portugal SA, Portugal’s largest private road operator, by an investor group including Swiss Life Asset Managers for $2.6 billion.
The Asia and Oceania region continues to lead deal activity and represented 50% of volume and 53% of value by acquirer region, with $20.2 billion in investments in H1 2020.
The UK and Eurozone region accounted for three of the largest 10 deals announced in H1 2020, including the only megadeal announced in the period: the Economic Stabilization Fund-Deutsche Lufthansa pending deal for $5.1 billion constituted 45% of UK and Eurozone investments by target region.
Local transactions represented 74% of North America investments by acquirer region. Trade tensions and declining globalization will continue to create a shift toward near-shoring and growing domestic supply-chain and operations.
Highlights of deal activity
T&L subsector analysis
The shipping, passenger air and logistics subsectors cumulatively accounted for 72% of total investments in the first half of 2020.
The shipping subsector led investments and represented 27% of value and 21% of volume in H1 2020. Four of the largest five shipping deals were within-border transactions in the Asia and Oceania region. Government-mandated lockdowns in most Asia and Oceania countries have resulted in lower ocean freight demand, while global ports have imposed operational restrictions, leading to shipping capacity reductions. In response, consolidation in the shipping subsector will continue as corporations seek to improve operational efficiency and financial performance while reducing debt. Three of the largest 10 deals announced in the first half of the year belonged to the shipping subsector, led by Port & Free Zone World FZE’s acquisition of the remaining 20% stake in port operator DP World Ltd. for $2.7 billion.
The passenger air subsector has been severely impacted by travel and tourism restrictions, in addition to increased public fear of contracting COVID-19 while traveling. Passenger air investments are aimed at improving liquidity and profitability, and protecting corporations from facing bankruptcy, as travel demand remains suppressed. The pending acquisition of Deutsche Lufthansa AG’s assets by Germany’s Economic Stabilization Fund for $5.1 billion was the largest passenger air deal announced in H1 2020, and constituted 53% of total subsector value. The passenger air subsector reported the highest average transaction size among all subsectors, reaching $875.9 million.
The logistics subsector drove M&A volume and represented 37% of all announced deals. Consumers are increasingly favoring contactless purchasing via e-commerce and home delivery services to avoid potential health risks. In response, logistics investments for warehousing, storage, distribution, and last-mile delivery services are on the rise to better serve growing online shopping demand and improve supply chain operations. Costco Wholesale Corp.’s acquisition of Innovel Solutions Inc. for $1 billion was the largest logistics deal recorded in H1 2020. The acquisition is intended to expand Costco Wholesale Corp.’s capabilities in e-commerce for heavy and larger consumer products such as white goods, furniture, and mattresses.
T&L deals outlook
We expect deal activity to pick up in the remainder of the year, although levels may not reach those in H2 2019. Asia and Europe have led the way demonstrating increased deal appetite in Q2 2020 due to an earlier recovery from COVID-19. We expect North America to follow in H2 2020.
Sellers will continue to look into divestitures to free up cash for liquidity or strategic investments. Acquires will seek to invest in technologies to improve service offerings and operational efficiencies, drive consolidation, and take advantage of distressed opportunities.
Private Equity: Private equity (PE) has over $1.7 trillion of dry-powder and is well positioned to participate in many of the investment opportunities in the T&L sector. We expect private equity to actively pursue underperforming businesses to deliver on their value proposition.
Technology/Partnerships: More than ever, investing in and partnering with innovative businesses is a critical success factor. We have seen increased interest in start-ups, including non-controlling investments by incumbents to get access to technology and innovation that disrupt T&L business models. We expect COVID-19 to accelerate this trend.
Sub-sector outlook
While we expect a general pick up in M&A activity for the remainder of 2020, we see specific drivers for certain sub-sectors:
Passenger Air: We expect significant headwinds from reduced travel to continue well into the next year. In early Q2 20, airlines started to restructure, including significant furloughs and layoffs. The Lufthansa bail-out approved in June 2020 was the largest T&L deal across all subsectors. We expect government rescue initiatives to drive further deal activity in H2 2020 as demand for domestic and international air travel continues at subdued levels. We also expect financial investors to pursue select opportunities, such as Bain Capital’s investment in Virgin Australia.
Shipping: The sub-sector has suffered from overcapacity for years which has been driving consolidation. The reduction in international trade increased this pressure and provided further impetus for consolidation. As a result, Shipping was the only subsector with increased deal value in H1 2020 vs H1 2019, and we expect strong deal activity to continue into H2 2020.
Logistics: Recent and dramatic changes in consumer behavior has been fueling e-commerce and demand for last mile delivery services.
We expect the significant growth of e-commerce will increase investment in warehousing, e-commerce fulfilment and on time last-mile delivery. We see strong interest, by corporations and PE alike, in companies providing these capabilities.
We also see increased interest by large incumbent logistics providers to take minority stakes in start-ups to get early access to innovation and technological advances.
We expect these trends to continue to drive deal activity. We also understand the significant uncertainties underlying our current health crisis. To the extent that the global health situation may deteriorate, these trends may be impacted significantly in uncertain ways.
About the data
The information presented in this report is an analysis of deals in the global transportation and logistics industry with a disclosed value of $50 million and above unless otherwise noted. Deal information was sourced from Refinitiv and includes deals for which targets have an SIC code that falls into one of the 56 transportation & logistics industry groups. Certain adjustments have been made to the information to exclude transactions which are not specific to transportation & logistics or incorporate relevant transactions that were omitted from the SIC industry codes.
This analysis includes all individual mergers, acquisitions, and divestitures for disclosed or undisclosed values, leveraged buyouts, privatizations, minority stake purchases, and acquisitions of remaining interest announced between July 1, 2017 and June 30, 2020, with a deal status of completed, partially completed, intended, pending, pending regulatory and pending completion and excludes all rumors and seeking buyers. Additionally, transactions that are spin-offs through distribution to existing shareholders are included.
Percentages and values are rounded to the nearest whole number which may result in minor differences when summing totals.
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