Global Outsourcing Demand Likely To Drive Exel Expansion
By PAUL JARVIS
April 10, 2000
LONDON -- Earth-shattering it may not be, but Exel PLC's (XXL) pact with Hungarian freight company Hungarocamion Rt. (R.HCN), unveiled Monday, is likely to be the first of several deals as the group moves to consolidate its position in the market for logistics provision.
Created through the soon-to-be-completed merger of NFC PLC - which now trades as Exel - and Ocean Group PLC (U.OTT), the group stands at the forefront of a market which is benefiting from a growing trend among multinational organizations toward outsourcing.
Major companies have been abandoning peripheral activities such as transport and warehousing, leaving them to specialists such as Exel, the second largest in the market, and market leader, Germany's Deutsche Post AG (G.DEP).
And with an increasing numbers of products being sourced from lower cost economies such as eastern Europe, the Far East and Africa, the need for global logistics providers has never been greater.
The Exel merger instantly created a group with that global scale, although gaps still exist. One of those is filled by the pact with Hungarocamion. As one of the largest international road transport companies in central and eastern Europe, Hungarocamion will give Exel a stronger hand as customers in the automotive and retail industries continue to transfer production to those regions.
More of these kind of linkups are likely, though the most probable form of expansion is acquisition. Exel said at the time of the merger that it will have around $1.5 billion to spend, and though a deal of that size is unlikely, the group clearly has few constraints to expanding its business.
Exel's growth prospects haven't gone unnoticed by investors. Since completing a three-year restructuring program toward the end of 1998, the share price has risen almost fourfold. At 1450 GMT, it was trading unchanged at 345 pence, 15 pence below its recently-established record high of 360 pence. Ocean, whose share listing will be used by the merged group, has risen almost threefold in the same period.
Most of that strength has been due to perceived opportunities presented by growth in business-to-business e-commerce. More recently the shares have been supported by the potential upside of the merger, which as well as creating a truly global player also generates annual cost savings of around GBP15 million.
Adding to the positive sentiment has been vague takeover speculation, amid talk that U.S. giant United Parcel Service of America Inc. (UPS) may be looking for a major logistics acquisition after raising $5.5 billion last year in the U.S.'s largest ever initial public offering.
With Ocean shares ahead 9 pence at 1,270 pence, the merged group is trading on around 28 times earnings, based on Credit Lyonnais Laing's forecast of GBP200.6 million pro forma pretax profit for the current fiscal year. This reduces to 25 times earnings the year after.
For a pure transport company this would look expensive, but Exel is now more of an outsourcing support business, where companies such as Capita Group PLC (U.CPI), Serco Group PLC (U.SRP) and Hays PLC (U.HYS) are afforded much higher ratings. This gap in valuations looks very likely to narrow.
