One of the leading third party logistic companies,
CH Robinson Worldwide Inc.
) is set to buy Phoenix International, Inc. for $635 million.
Phoenix International is a U.S. based privately-held global
freight forwarding company that primarily deals in ocean freight
along with other services like air freight and custom brokerage.
The company has 76 offices across 125 countries and serves
approximately 15,000 customers.
The deal is expected to close in late 2012. No deal terms have
been disclosed yet but CH Robinson would split the payment into
cash and equities. The company expects to pay approximately $571.5
million in cash and approximately $63.5 million will be paid
through newly-issued stock of the company.
The uncertain market scenario in the truck brokerage industry is
one of the key factors responsible for CH Robinson's focus on other
market opportunities. Capacity issues coupled with rising third
party carrier cost in truck shipments are forcing the company to
look beyond its conventional truck brokerage services.
We believe that the company is facing stiff market conditions in
the form of intense competition and capacity constraints in the
truck market, resulting in a continuous decline in net revenue
margin. The company's transportation net revenue margin is at a
record low and is likely to further deteriorate if supply costs
continue to rise at a faster rate compared to price recoveries. The
prevailing economic condition has forced shippers to follow
aggressive cost management strategies within their supply chain,
thereby making them unreceptive to price increases. As a result,
the company is struggling to pass on higher transportation costs to
customers, resulting in lower profits.
At the same time, we would also like to point out that near-term
outlook on ocean and air freight is not very attractive. We believe
uncertainty over ocean freight is likely to persist as ocean liners
are unlikely to offer any volume discounts, leading to higher
freight rates that will affect freight forwarders' purchased
transportation cost. On July 11, 2012, 15 ocean carriers operating
in the eastbound Asia-to-U.S. trade represented by the Transpacific
Stabilization Agreement (TSA) announced their largest rate
increases for 2012. Effective from August, rate increases
include $500 per forty-foot equivalent unit (FEU) to the West Coast
and $700 to all other U.S. destinations. The increases on
refrigerated imports range from $1,000 to $1,250. TSA members have
also raised freight rates ranging from $1,000 per-FEU to $1,250
per-FEU on refrigerated imports for Asia-West Coast services,
effective August 15. The hikes represent the fifth increase in the
eastbound trans-Pacific freight rates since January 1, 2012. Going
forward, the air freight industry outlook remains subdued due to a
sluggish economy and lower market demand.
Further, we believe international air and ocean freight
forwarding and customs brokerage are intensively competitive and
are expected to remain so in the foreseeable future. There are a
large number of entities competing in the international logistics
Expeditors International of Washington Inc.
). Historically, the industry has experienced consolidations into
larger firms striving for stronger and more complete multinational
and multi-service networks. In addition, regional and local brokers
and freight forwarders also remain a competitive force.
Given the current outlook of the freight forwarding industry,
the near-term synergies arising from this deal is expected to
remain modest. However, given Phoenix' strong global footprint and
financial performance, with revenues of approximately $807 million
and adjusted operating income of approximately $48 million, the
deal signifies potential long-term benefits.
We are currently maintaining our long-term Neutral
recommendation on C.H. Robinson. For the short term, the company
holds a Zacks #3 Rank (Hold).
CH ROBINSON WWD (CHRW): Free Stock Analysis
EXPEDITORS INTL (EXPD): Free Stock Analysis
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