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Sterling Capital Management claims US$1.35bn offer ‘grossly undervalues’ the US forwarding and logistics group.

A significant shareholder of UTi Worldwide, understood to control around 3.3% of its common stock, has said it will vote against DSV’s proposed US$1.35 billion acquisition of the US forwarding and logistics group, claiming the $7.10 per share offer “grossly undervalues UTI Worldwide”.

In a note to UTi Worldwide chairman Roger MacFarlane, published yesterday in a filing by UTi to the US Securities & Exchange Commission(SEC), Sterling Capital Management senior managing director Eduardo Brea responded to the 9 October announcement of the acquisition agreement between UTi and DSV, writing: “We understand that the current management team and the Board share our frustration with the declining profitability and loss of market share at UTI Worldwide due to the well documented and poorly executed information technology initiatives at the company.

“As long time shareholders, however, we believe that DSV’s of $7.10/share grossly undervalues UTI Worldwide. After seven years of substantial investments, capital raises and management turnover, we were led to believe that we were in the ‘ninth inning’ of a turnaround at the company.

“UTI now has a ‘gold plated’ IT platform and is winning in the marketplace again for the first time in many years. Operating leverage, particularly in freight forwarding should be dramatic with incremental account wins.”

He noted that liquidity also appeared to be improving, “with free cash generation evident and significant declines in working capital further aiding cash flows”.

He said that although come analysts can talk about the “fairness” of the deal using current or near-term profitability metrics, with “modest additional sales momentum”, UTI had the capability to return to adjusted EBITDA levels above $200 million.

Brea added: “The company was able to generate such a level in 2007, 2008, and 2012 at sales levels not too dissimilar to current trends. Using a ‘more normal’ $200 million EBITDA threshold values the current DSV offer at a paltry 6.75 times EBITDA – or almost a 50% discount to offers for other logistics players.”

He listed various logistics sales this year, including those of APL Logistics, Toll Holdings and Coyote Logistics, where he noted that the EV/EBITDA multiple (the company’s enterprise value divided by earnings before interest, tax, depreciation, and amortization) was between 13 and 18.

Noting that using an enterprise value (EV) of $1.35 billion and the “depressed” current year run rate EBITDA of around $100 million was a multiple of 13.5 times EBITDA, using UTi management’s “6 month out” run rate EBITDA of around $138 million, would make an EV of $1.35 billion a multiple of just 9 times EBITDA. And using a “normalized” EBITDA of $200 million meant that an EV of $1.35 billion was 6.75 times EBITDA.

Brea concluded: “DSV’s offer, in short, substantially undervalues UTI Worldwide. Furthermore, DSV comments on its conference call that it believes it can achieve meaningful margin improvement from UTI in just a couple of years as well as the increase in DSV’s market capitalization north of $500 million since the announcement attest to this.

“This is not the outcome that places a reasonable private market value on UTI Worldwide for its owners. We intend to vote against the transaction.”

Contacted by Lloyd’s Loading List.com about the comments from Sterling, UTi Worldwide said it did not have any comment at this time.

DSV responded: “In our view the offer we have made is attractive to the shareholders of UTi Worldwide. This view is also shared by the board of directors of UTi Worldwide.”

Announcing the acquisition agreement earlier this month, the two companies said the per-share consideration represents a premium to the ordinary shareholders of approximately 50% compared to the closing price of UTi on 8 October 2015, and a premium of approximately 34% compared to the 30-day volume-weighted average closing price.

They said the boards of directors of DSV and UTi had unanimously approved the transaction, although it still required the agreement of UTi’s shareholders. But they noted that “UTi’s largest shareholders, funds controlled by P2 Capital Partners, holding approximately 10.8% of the ordinary shares and all of the convertible preference shares, have entered into an irrevocable voting undertaking in support of the transaction, subject to certain conditions”.

In his analysis last week of the proposed, Transport Intelligence (Ti) analyst Thomas Cullen noted that while DSV had offered to effectively pay US$1.35 billion for UTi, which it described as a 0.34 multiple of sales, “valuing UTi by a price-to earnings multiple is more difficult due to the poor profitability of the company”.

But he felt that the DSV offer of US$7.10 per share was “and all the more generous as the stock had experienced a sustained fall since June”, concluding that it was hard to see much resistance from shareholders to this offer.

Reuters last week noted that some analysts see a counter-bid as a possibility for UTi, whose shares have tumbled from $14.00 in December. The stock closed yesterday at $7.08, a slightly below the offer price.

But analyst Jim Corridore at S&P Capital IQ last week said he expected the transaction to go through, adding that UTi “was never able to get its restructuring on track, and was, in our view, poorly managed”, Reuters reported.

Source: Lloyds Loading List