M&A Qualitative Case Study – The Best Acquisition for DSV A/S – 30 Minutes

You have 30 minutes to review the information below and present your findings. You don’t
have to write detailed responses, but it will help to take notes, make a rough outline, and note
the key financial figures.
Your bank, Goldman Stanley, has been appointed to negotiate a buy-side M&A deal for DSV
A/S, a European transportation and logistics services company headquartered in Denmark.
The company is considering four different acquisition candidates:

 STEF SA – Another European transportation and logistics firm, headquartered in France.

 Universal Logistics Holdings, Inc. – A U.S.-based transportation and logistics company.

 Kerry Logistics Network Limited – An Asian logistics services company in Hong Kong.

 CAR Inc. – A car rental company based in Beijing.

Review DSV’s strategy and long-term goals, the description for each potential target company,
and the financial information in the provided Excel file.
Based on that information, prepare to answer the following questions:
1) Of these four companies, which one is the best for DSV to acquire? What financial and
strategic reasons justify your choice?

2) What purchase consideration do you recommend for this deal?

3) Will the deal be accretive or dilutive? How can you estimate this without having the
full financial information for each company?

4) If you had more time to make a decision, what additional information would you
request?
SUGGESTED STRATEGY AND SOLUTIONS:
Step 1 – Quick Financial Analysis
First, do a quick assessment in Excel to see which of these companies DSV can afford.

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The company has little Cash – only around 1.9 billion – so it might be able to use only a small
portion of that to fund a deal. Let’s say it can use 1.0 billion.
It can’t go above 5x Debt / EBITDA, and it’s already levered at 2.7x Debt / EBITDA with 10.5
billion of Debt.
Therefore, it can raise only an additional 8.8 billion of Debt to do any deal.
Beyond that, it would have to use Stock. Its current Equity Value is 56.2 billion, and it doesn’t
want to dilute itself more than 25% in any M&A deal.
25% dilution represents 14.0 billion of Stock, so the company could afford deals up to 22.8
billion, and 23.8 billion if we count the Cash.
If we assume a 30% premium to each company’s Current Equity Value, DSV could afford each
one, but CAR would be a stretch.
For example, if you add up DSV’s and CAR’s Debt and EBITDA in the LTM period, and also factor
in the New Debt used to fund the deal, the Combined Debt / EBITDA is just above 5x. For Kerry,
it comes in at 4.4x.
These results don’t immediately rule out CAR, but they do make the company less ideal for an
acquisition.
Step 2 – Qualitative Analysis of Each Company and Alignment with DSV’s Goals
DSV wants to grow at above 3% per year, target 8%+ EBITDA margins, expand outside of
Europe, and remain asset-light. We also know that it just acquired UTi Worldwide, a North
American logistics provider.
STEF does not fit in with DSV’s goals at all – its growth is anemic, it’s based entirely in Europe,
and it doesn’t even have 8% EBITDA margins.
Universal Logistics Holdings is a bit better, with 8-9% EBITDA margins and a presence in North
America. It’s also another asset-light provider, but its growth rates are quite low (under 2% in
Year 2 and negative in the LTM and Year 1 periods).
Also, DSV just acquired UTi, so it has already diversified its revenue and gained a presence in
North America, and it will be busy with the acquisition integration over the next year.
Kerry Logistics is a better fit in many ways: It has 6-8% annual growth, 10-11% EBITDA margins,
and 82% of its revenue comes from Asia. BUT it’s also NOT asset-light: It owns its assets.

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It’s only about 1/3 the size of DSV, so the company might be able to spin itself as “asset-light”
since the majority of its revenue will not be based on owned assets.
Finally, CAR has the highest growth rates and margins of any company in this set, and 100% of
its revenue comes from China.
But there are a few glaring problems: First off, car rental services are quite different from
“transportation and logistics services,” so this would be a completely new market for DSV.
They are loosely related since they both involve vehicles, but it’s still a stretch.
Also, the company is not “asset-light” at all since it owns 91,000+ vehicles.
Finally, it’s unclear whether or not DSV could afford CAR: The post-deal LTM Debt / EBITDA
would be at or above 5x, and CAR is already levered at 5.4x, with relatively high interest on its
Debt (~7% based on the 2.8x EBITDA / Interest ratio).
Step 3 – Make a Decision and Justify It
Based on these factors, we would recommend Kerry Logistics as the best choice: DSV can
afford it, the deal would diversify its revenue and increase the percentage from APAC, and DSV
would benefit from higher growth rates and margins.
The main downside is that Kerry Logistics is not asset-light, but we don’t know how important
that is to DSV. There may not be that many Asian, asset-light transportation/logistics
companies, in which case DSV might have to compromise here.
Also, if 60-70% of the company’s revenue comes from asset-light operations, it could still
present itself as “asset-light” to investors.
Step 4 – Calculate the Purchase Consideration
We know that Kerry Logistics would demand a premium, but we don’t know what it would be in
the absence of valuation information.
If we assume a standard 30% premium, DSV would have to pay 20.2 billion for Kerry.
DSV’s Cost of Debt is extremely low – 43.4x EBITDA / Interest implies a ~1% Pre-Tax Cost of
Debt, and likely a ~0.6% – 0.7% After-Tax Cost of Debt.
DSV’s Cost of Stock ranges from 3% to 5%, depending on the year, so we want to maximize the
amount of Debt used.
Based on these figures and the constraints in Step 1, we recommend the following structure:

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  Cash: 1.0 billion (~5%)
 Debt: 8.8 billion (~44%)
 Stock: 10.4 billion (~51%)
Step 5 – Accretion/Dilution
As always, you can estimate EPS accretion/dilution by comparing the Weighted Cost of
Acquisition to the Seller’s Purchase Yield.
If we assume the 20.2 billion purchase price for Kerry, the company’s Year 1 Purchase Yield
would be ~4.9%, and its Year 2 Yield would be ~5.3%.
An acquisition of this size will likely take at least a year to close, so the Year 2 figure is more
relevant.
We don’t know what DSV’s Costs of Cash, Debt, and Stock are, but we can make the following
estimates:

 Cost of Cash: Likely very low, and certainly lower than the Cost of Debt – maybe 0.5%
after taxes.

 Cost of Debt: See the section above – we can guesstimate this from the EBITDA /
Interest ratio of 43.4x. It’s likely 0.7% after taxes.

 Cost of Stock: The company’s Year 2 Yield is 2.9 billion / 56.2 billion = ~5.2%.
Based on these numbers, we can already tell the deal will be accretive because all these Costs
are below Kerry’s Year 2 Yield of 5.3%.
By acquiring Kerry, DSV would be giving up lower-yielding assets for higher-yielding ones.
There’s no need to make any further calculations, but if you want to do so, the Weighted Cost
of Acquisition is 0.5% * 5% + 0.7% * 44% + 5.2% * 51% = 3.0%.
The other implication is that almost any deal would be accretive under these conditions
because DSV’s Costs of Cash and Debt are low, and it cannot use much Stock.
For this deal to be dilutive, the Seller’s Purchase P/E multiple would have to be above 33.3x.
That’s extremely unlikely in an industry like transportation/logistics, which is one reason why
accretion/dilution is not that important in this case study.
Step 6 – Additional Information

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The most helpful additional information would be a ranking of DSV’s strategic priorities and
valuation information for each acquisition candidate (e.g., public comps, precedent
transactions, and recent premiums in the sector).
It seems like almost any deal would be accretive, so more detailed financial projections or
synergy estimates would not be that useful.
DSV’s strategic priorities would be helpful because we don’t know how much it cares about
being a 100% “asset-light” company; if this is a deal-breaker, our Kerry recommendation would
change, but if it’s negotiable, we might stick with Kerry.
Valuation information would also be helpful because we don’t know how much each company
would cost in real life; we estimated a 30% premium for each one, but that figure could be
affected by recent share price histories and the multiples of comparable companies.
For example, if Kerry would sell only for a 100% premium, then DSV could not do the deal.
But if it would sell for a 15% premium, then the deal would become even more viable.

DSV’s Strategy and Long-Term Goals:

Currently, DSV is the world’s fourth-largest freight forwarder. The company earned 62.7 billion
DKK in revenue in the LTM period, with 3.9 billion of EBITDA and 1.6 billion of Net Income.
As an asset-light provider, the company owns no ships or airplanes and instead acts as a
“broker” between companies and transportation contractors.
The market is highly fragmented, with the top 10 global providers having a combined market
share of only 35% (DSV’s market share is ~3%).
Approximately 27% of its revenue came from the Nordic countries, 15% from Southern Europe,
38% from Other Europe/EMEA, 10% from the Americas, and 10% from APAC.
DSV’s Air & Sea division contributed 42% of its revenue, its Road division contributed 47%, and
its Solutions division was responsible for 11% of its revenue.
The company recently acquired UTi Worldwide, a global, asset-light supply chain and logistics
provider headquartered in the U.S. UTi is strong in North America and South Africa.
DSV has indicated the following financial and strategic goals:

 EBITDA Margin: The company is targeting at least an 8% EBITDA margin in coming years.

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  Debt / EBITDA: The company is targeting a range of 1.0x – 1.5x. The maximum Debt /
EBITDA ratio the company will accept is 5.0x.

 Growth: The company plans to grow organically and via acquisitions, and it’s aiming to
grow at a rate above the 3% projected market growth rate.

 Industry and Geographic Criteria for Acquisition Targets: The company wants to remain
asset-light and increase its exposure to markets outside of Europe.

 Dilution: The company will accept no more than 25% dilution in an M&A deal.
The company’s financial projections, Equity Value, Enterprise Value, valuation multiples, and
credit stats and ratios are shown in the attached Excel file.
Description of Acquisition Candidate #1 – STEF SA
STEF SA is a European leader in cold logistics (-25°C to +18°C). It provides transportation and
logistics for all temperature-sensitive and agricultural food products.
The company’s clients consist of food companies, manufacturers, retailers, and out-of-home
foodservice outlets.
STEF employs 15,590 staff members in 7 European countries (Belgium, Spain, France, Italy, the
Netherlands, Portugal, and Switzerland).
The company also owns 219 platforms and warehouses, 1,950 refrigerated trailers, and 1,900
vehicles.
The company was founded in 1920 and is headquartered in Paris. You can find its financial
information in the attached Excel file.
Description of Acquisition Candidate #2 – Universal Logistics Holdings, Inc.
Universal Logistics Holdings, Inc. is a leading asset-light provider of customized transportation
and logistics solutions throughout the United States, Mexico, Colombia, and Canada.
The company serves its customers across the entire supply chain, including with transportation,
value-added, intermodal, air, ocean and customs brokerage services.
It serves the automotive, steel, oil and gas, alternative energy, and manufacturing industries, as
well as other transportation companies who aggregate loads from various shippers.

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The company was founded in 1981 and is headquartered in Warren, Michigan. You can find its
financial information in the attached Excel file.
Description of Acquisition Candidate #3 – Kerry Logistics Network Limited
Kerry Logistics is Asia's leading logistics service provider, with extensive operations in Greater
China and the ASEAN region. Its core businesses encompass integrated logistics, international
freight forwarding, and supply chain solutions.
Approximately 82% of the company’s revenue comes from Asia, and it is one of the fastest-
growing listed logistics companies in the world.
Unlike most other logistics providers, Kerry Logistics owns its assets and operates 45 million
square feet of logistics facilities, as well as a unique cross-border transportation network (KART)
that connects the ASEAN countries and China.
Kerry Logistics Network Limited was founded in 1981 and is headquartered in Hong Kong. You
can find its financial information in the attached Excel file.
Description of Acquisition Candidate #4 – CAR Inc.
CAR Inc. is the largest car rental company in China, with a fleet larger than the combined fleet
of the #2-20 car rental companies in the country.
The company has direct operations in over 70 Chinese cities, with a franchisee presence in 200+
lower-tier cities.
The company’s fleet consists of over 91,000 vehicles, and it has a network of 900+ service
locations in China.
In addition to car rentals, the company provides value-added services such as 24/7 roadside
assistance, auto insurance, and vehicle delivery; it also sells auto parts, used cars, and vehicle
parking management services.
CAR Inc. was founded in 2007 and is headquartered in Beijing. You can find its financial
information in the attached Excel file.

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