There was once a company whose name commanded a kind of hushed reverence in transport circles. If you were lucky enough to persuade this organisation to handle your distribution, it was on the strict understanding that you rearranged your operations to suit them. You were being accorded a singular privilege and no-one would blame you for casually dropping the fact into conversation.
Salvesen today is a perfectly respectable operator but it still hardly seems credible that Christian Salvesen could have evoked such respect back in the seventies and eighties. Those days are, of course, long gone and it is now only a matter of time before the name is gone as well.
There is irony in the fact that this long-established patrician of the industry should fall to an aggressive newcomer like Norbert Dentressangle, the French company that was founded 107 years after Salvesen.
The changing fortunes of the two businesses are clearly seen in their financial results. In the five years to 2006, Dentressangle’s sales rose 34 per cent to some £1bn (1.6bn euros) while operating profit was up 41 per cent to some £52m (83.1m euros).
Profitability
Salvesen’s sales have grown more slowly – only nine per cent to £820.7m – over the period. But it is the movement in profitability that really highlights the group’s difficulties. In 2002, it reported an operating profit of £40.5m. But that was cut to a mere £14.9m by a bunch of exceptional items relating to discontinued operations and goodwill amortisation.
And while it has put those big restructuring costs behind it, the company is now producing an operating profit of £20.9m. This gives it a profit margin of 2.5 per cent – just half what it was five years ago and half that of Dentressangle. The French company also shows a better return on capital employed – 14 per cent against Salvesen’s 10 per cent.
There have been suggestions that, at a price of £254.4m, Dentressangle is over-paying for Salvesen. The price represents an 80 per cent premium over Salvesen’s share price immediately before the bid. However, Salvesen’s interim results for the year to 31 March show an asset value for the business of £262.5m.
The fact that investors have been valuing the Salvesen business at less than the value of its assets is not simply a result of the struggle it has been having to rebuild the profitability of its transport business. It also reflects the generally poor view that the UK stock market takes of the third party logistics sector as a whole.
And the fact that members of the Salvesen family are supporting the deal is also highly significant. Family members are thought to own as much as 30 per cent of the company and they have played a key role in blocking bids in the past.
In 1996, Salvesen turned down a bid from Hays, which valued it at about £1 billion, saying it was difficult to see any industrial logic in the move. The Hays distribution business is now part of Kuehne + Nagel. Salvesen also rejected an approach from TDG in 2004.
Approval
The acquisition will require the approval of the Salvesen shareholders at a meeting convened by the Court and an extraordinary general meeting, which are expected to be held on or around 7 November. Until then, despite the fact that a number of major shareholders, including members of the Salvesen family, have backed the Dentressangle bid, there is time for another bidder to emerge.
It is unlikely, though, that another bidder would be willing to top the Dentressangle offer. Other UK-based third party logistics providers would prefer to see major investments going into high-return high growth markets such as Eastern Europe rather than the highly competitive domestic market.
The transport business has been a major cause of Salvesen’s woes in recent years. When Salvesen bought Swift Transport Services in the early 1990s it was seen as a major coup. Swift had a high reputation and Salvesen fought off a strong bid from Exel to secure the deal. The problem is this network operation has historically been focused on manufacturing industry and, as is all too obvious, this has been in steady decline in the UK over the past few years.
Stewart Oades’ strategy has been to move the focus of the business away from manufacturing and find new markets for its network operations.
Salvesen chairman David Fish said in the interim report: “A new managing director and new management team are working to restore the UK Transport business. Progress during the year was slower than hoped. The unplanned start-up costs were a significant factor in the increased losses for the year.
“For the longer term, we are investigating options that will require more fundamental infrastructure changes.”
Dentressangle, which is headquartered near Lyon in France, sees the takeover as a major step in its plan to become a major player in the European market. Chief executive Jean-Claude Michel said: “I am convinced that the acquisition of Christian Salvesen will give rise to significant value creation. I am delighted that key shareholders of Christian Salvesen, including certain members of the Salvesen family, and the board of Christian Salvesen have agreed to support our offer. We look forward to working with the employees of Christian Salvesen to provide the highest level of service to our customers.”
Salvesen chief executive Stewart Oades said: “I am pleased we have reached agreement to form an enlarged group which will provide a stronger organisation, with greater opportunities for employees and customers. The combination will create a leading transport and logistics business with a wider range of services and capabilities, greater geographical coverage and a commitment to bringing together the best of both businesses.”
Enviable
Despite Salvesen’s problems, it has a reputation as a solid operator and can boast an enviable customer base. The takeover will almost double Dentressangle’s sales and bring a host of prestigious contracts with blue chip companies like Marks & Spencer.
But it won’t suddenly solve Salvesen’s difficulties. In the relatively short time he has had since joining the business, Oades has been able to get things moving fostering more entrepreneurial culture, initiating systems development work, and selling off the non-core frozen vegetable business to Dutch group Pinguin for £17.2m, as well as putting in place a strategy to restore the profitability of the transport operation.
However, there is clearly further work to be done in improving profitability in UK transport as well as in the integration of the two businesses.
Dentressangle has indicated that it is not planning major cuts but there are questions over how it plans to integrate the Salvesen business. For example, would it seek to extend its franchise transport operations? At the end of last year Dentressangle had more than 60 franchisees running more than 100 vehicles. Could that be the solution to Salvesen’s transport woes?
Takeover logic
- Dentressangle says the takeover has a number of benefits:
- creation of one of the European market leaders in transport and logistics;
- enhancing Dentressangle’s and Salvesen’s complementary strengths including expansion of distribution networks and strengthening of presence in food and frozen products distribution;
- increasing Dentressangle’s geographic footprint into the UK, Benelux and the Iberian Peninsula;
- attractive financial profile including potential for increased margins, strong cash flow and the realisation of significant synergies;
- building on Salvesen’s established Transport Division UK turnaround programme including initiatives underpinning efficiency and maintaining strong customer performance;
- developing relationships with shared customers and pan-European clients through cross-selling initiatives, as well as approaching new clients with an expanded pan-European offering.
