In recent years, it has been well documented that e-commerce fulfilment has become a significant driver for growth in the logistics sector, as SME retailers demand quick, efficient, and reliable shipping solutions to stay competitive with their larger and more established competitors. Last year non-food retail e-commerce in the UK saw a considerable year-over-year growth of 46.5% and this is expected to continue with growth of 20.5% expected in 2021 (source: eMarketer).
Growth in the sector has been driven by consumer behaviour favouring online shopping as people have become more accustomed to new ways of ordering retail goods – a trend that was accelerated during the various lockdowns imposed over the last 18 months. However, as the UK progresses into the “new normal” following the ease of lockdown measures, the consequential effects of both the pandemic and Brexit are impacting the 3PL landscape for both market participants, their customers and their suppliers.
Technology
Retailer’s lack of visibility into the far reaches of their supply chains has been highlighted by the unpredictability of fluctuating market demand. As a result, businesses have worked to shorten their supply chains and have demanded comprehensive logistics solutions from companies that can provide visibility and mitigate anticipated disruptions. Technological change in the industry has been accelerated to keep up with this demand accelerated by the pandemic – induced delays and shortages necessitating a more robust supply chain management.
With the market landscape constantly changing, agile logistic companies that have integrated advanced data analytics and AI into their operations will be better positioned to win business and market share by giving their clients the ability to adapt through data-driven decision making. As a result, businesses with new tech-enabled solutions are likely to become more attractive to acquirers for the increased solutions which they provide; and wider service offering which has been one of the main drivers of M&A activity and fund raising in 2021.
Shipping goods into the UK
The US$9.6 billion in trade lost during a brief six-day closure of the Suez Canal exemplifies the challenges faced by a heavy reliance on container shipping. As trade resumed, demand grew faster than expected, outstripping supply and raising costs globally. This was propagated by the shift of shopping patterns triggered by the pandemic which resulted in increased import demand for manufactured consumer goods (mainly transported via shipping containers). The UK has been hit especially hard by rising costs and shortage of containers, experiencing price rises between 500-800% for importing goods from China.
Consequently, retailers looking to increase stock held with their UK-based fulfilment specialists have suffered greatly from an increase in the cost of landing goods as well as much longer lead times. Businesses that are unable to absorb these price increases are ultimately being forced to either stop importing or pass the cost on to the end customers. This has impacted the volume of goods coming into logistics providers and therefore impacted the volume-based revenues for those providers.
Consequently, technology start-ups looking to more effectively manage the supply chain, track goods coming into and out of the UK and allow for container sharing are becoming attractive to VC’s looking to invest in the sector. For example, Forto, a digital freight forwarder that experienced a boom during the pandemic, raised £40 million in funding at the end of 2020 and Zencargo raised £30 million in May this year.
Storage
Supply chain disruption has also resulted in certain retailers ordering more stock to mitigate the risk of not fulfilling orders if there is further disruption to the supply chain. This has increased the storage requirements in the fulfilment centres designed to process goods and not store them long term; consequently, inflicting pressure on current warehousing demand, impacting rental costs. Rental space saw a record quarterly rental take-up of more than 15 million square feet in Q2 2021, driving rent inflation as tenants try to avoid the uncertainty surrounding deliveries (Source: CBRE UK warehousing review).
Again, well-funded tech-enabled businesses are providing solutions, with logistics and supply chain consultancy Bis Henderson receiving a significant investment from TPA Capital to support the company’s growth plans. Their Bis Space division supports businesses in the sourcing and provision of warehousing space in the increasingly tight UK warehousing market. This type of service also allows growing logistics businesses to lease and invest in sites much larger than their current client base requires on the basis that they can use these platforms to generate income from unused space whilst their business grows.
Driver crisis
The UK labour mismatch has resulted in a record high of 1.2 million vacancies, as evidenced by recent lines at gas stations caused by a shortage of lorry drivers to transport the fuel. The current shortage of HGV drivers has been exacerbated by the Brexit-related points-based immigration system, which has been compounded by the increased demand for road deliveries in the run-up to Christmas. Despite the attempt by the government’s efforts to address the problem by issuing 10,500 temporary visas to lorry drivers and poultry workers, the problem is likely to persist as a dearth of EU labour is not the only cause; other factors such as COVID, unattractive pay and working conditions are all contributing.
This is putting pressure on the last mile delivery providers in the e-commerce supply chain with carriers increasing costs and, in some instances, drivers not being able to make collections (potentially impacting SLA agreements with the fulfilment providers customers). This has created opportunities for start-ups such as Hived, which uses bicycles to complete the “final stretch” of deliveries in cities whilst also providing a zero-emission service. Hived has already raised $2.4 million, joining other start-ups in the space that have received funding, such as Scandinavian Budbee, which has raised $52 million to date. As the driver crisis continues and pressure to decarbonize the logistics industry grows, investment in this sector is likely to increase into 2022.
EU red tape
Brexit has brought in regulatory changes for cross border trading that have massively impacted the logistics industry, such as the need for tariff codes and EORI numbers to move goods between the EU and UK has made it more costly and challenging for retailers to trade across borders. In response, a number of UK-based e-commerce fulfilment providers have either partnered with EU based businesses with similar challenges getting good into the UK or invested in their own sites.
This is a nascent but growing area and is likely to be an area attracting funding from venture capital going into 2022. Further, with US and EU providers looking to find a logistics solution within the UK to avoid cross border tariffs it makes UK fulfilment providers and attractive target for cross-border M&A.
Conclusion
Whilst a number of the challenges facing the industry are being addressed by well-funded market entrants, others will be addressed through scale; this continues to drive market consolidation in the logistics sector. Wincanton’s recent acquisition of Cygnia and Whistl’s acquisition of Clientbase (a deal advised on by HMT) are both examples of larger logistics providers acquiring entities with an e-commerce fulfilment capability.
We believe this M&A trend will continue into 2022 and we would be delighted to talk to shareholders in the sector currently contemplating a sale as well as innovative start ups looking to seek growth capital for expansion.
In recent years, it has been well documented that e-commerce fulfilment has become a significant driver for growth in the logistics sector, as SME retailers demand quick, efficient, and reliable shipping solutions to stay competitive with their larger and more established competitors. Last year non-food retail e-commerce in the UK saw a considerable year-over-year growth of 46.5% and this is expected to continue with growth of 20.5% expected in 2021 (source: eMarketer).
Growth in the sector has been driven by consumer behaviour favouring online shopping as people have become more accustomed to new ways of ordering retail goods – a trend that was accelerated during the various lockdowns imposed over the last 18 months. However, as the UK progresses into the “new normal” following the ease of lockdown measures, the consequential effects of both the pandemic and Brexit are impacting the 3PL landscape for both market participants, their customers and their suppliers.
Technology
Retailer’s lack of visibility into the far reaches of their supply chains has been highlighted by the unpredictability of fluctuating market demand. As a result, businesses have worked to shorten their supply chains and have demanded comprehensive logistics solutions from companies that can provide visibility and mitigate anticipated disruptions. Technological change in the industry has been accelerated to keep up with this demand accelerated by the pandemic – induced delays and shortages necessitating a more robust supply chain management.
With the market landscape constantly changing, agile logistic companies that have integrated advanced data analytics and AI into their operations will be better positioned to win business and market share by giving their clients the ability to adapt through data-driven decision making. As a result, businesses with new tech-enabled solutions are likely to become more attractive to acquirers for the increased solutions which they provide; and wider service offering which has been one of the main drivers of M&A activity and fund raising in 2021.
Shipping goods into the UK
The US$9.6 billion in trade lost during a brief six-day closure of the Suez Canal exemplifies the challenges faced by a heavy reliance on container shipping. As trade resumed, demand grew faster than expected, outstripping supply and raising costs globally. This was propagated by the shift of shopping patterns triggered by the pandemic which resulted in increased import demand for manufactured consumer goods (mainly transported via shipping containers). The UK has been hit especially hard by rising costs and shortage of containers, experiencing price rises between 500-800% for importing goods from China.
Consequently, retailers looking to increase stock held with their UK-based fulfilment specialists have suffered greatly from an increase in the cost of landing goods as well as much longer lead times. Businesses that are unable to absorb these price increases are ultimately being forced to either stop importing or pass the cost on to the end customers. This has impacted the volume of goods coming into logistics providers and therefore impacted the volume-based revenues for those providers.
Consequently, technology start-ups looking to more effectively manage the supply chain, track goods coming into and out of the UK and allow for container sharing are becoming attractive to VC’s looking to invest in the sector. For example, Forto, a digital freight forwarder that experienced a boom during the pandemic, raised £40 million in funding at the end of 2020 and Zencargo raised £30 million in May this year.
Storage
Supply chain disruption has also resulted in certain retailers ordering more stock to mitigate the risk of not fulfilling orders if there is further disruption to the supply chain. This has increased the storage requirements in the fulfilment centres designed to process goods and not store them long term; consequently, inflicting pressure on current warehousing demand, impacting rental costs. Rental space saw a record quarterly rental take-up of more than 15 million square feet in Q2 2021, driving rent inflation as tenants try to avoid the uncertainty surrounding deliveries (Source: CBRE UK warehousing review).
Again, well-funded tech-enabled businesses are providing solutions, with logistics and supply chain consultancy Bis Henderson receiving a significant investment from TPA Capital to support the company’s growth plans. Their Bis Space division supports businesses in the sourcing and provision of warehousing space in the increasingly tight UK warehousing market. This type of service also allows growing logistics businesses to lease and invest in sites much larger than their current client base requires on the basis that they can use these platforms to generate income from unused space whilst their business grows.
Driver crisis
The UK labour mismatch has resulted in a record high of 1.2 million vacancies, as evidenced by recent lines at gas stations caused by a shortage of lorry drivers to transport the fuel. The current shortage of HGV drivers has been exacerbated by the Brexit-related points-based immigration system, which has been compounded by the increased demand for road deliveries in the run-up to Christmas. Despite the attempt by the government’s efforts to address the problem by issuing 10,500 temporary visas to lorry drivers and poultry workers, the problem is likely to persist as a dearth of EU labour is not the only cause; other factors such as COVID, unattractive pay and working conditions are all contributing.
This is putting pressure on the last mile delivery providers in the e-commerce supply chain with carriers increasing costs and, in some instances, drivers not being able to make collections (potentially impacting SLA agreements with the fulfilment providers customers). This has created opportunities for start-ups such as Hived, which uses bicycles to complete the “final stretch” of deliveries in cities whilst also providing a zero-emission service. Hived has already raised $2.4 million, joining other start-ups in the space that have received funding, such as Scandinavian Budbee, which has raised $52 million to date. As the driver crisis continues and pressure to decarbonize the logistics industry grows, investment in this sector is likely to increase into 2022.
EU red tape
Brexit has brought in regulatory changes for cross border trading that have massively impacted the logistics industry, such as the need for tariff codes and EORI numbers to move goods between the EU and UK has made it more costly and challenging for retailers to trade across borders. In response, a number of UK-based e-commerce fulfilment providers have either partnered with EU based businesses with similar challenges getting good into the UK or invested in their own sites.
This is a nascent but growing area and is likely to be an area attracting funding from venture capital going into 2022. Further, with US and EU providers looking to find a logistics solution within the UK to avoid cross border tariffs it makes UK fulfilment providers and attractive target for cross-border M&A.
Conclusion
Whilst a number of the challenges facing the industry are being addressed by well-funded market entrants, others will be addressed through scale; this continues to drive market consolidation in the logistics sector. Wincanton’s recent acquisition of Cygnia and Whistl’s acquisition of Clientbase (a deal advised on by HMT) are both examples of larger logistics providers acquiring entities with an e-commerce fulfilment capability.
We believe this M&A trend will continue into 2022 and we would be delighted to talk to shareholders in the sector currently contemplating a sale as well as innovative start ups looking to seek growth capital for expansion.
Whenever we consider the potential acquirers for a client business, we explore whether overseas buyers are likely to come to the table with a winning bid. Disposal processes where we do not approach potential overseas acquirers at all are increasingly unusual.
As process norms around the world increasingly align, with the increasing ease of international communications, and with vast amounts of deployable capital available globally, those approaches are delivering more and more completed deals.
However, to deliver a completed cross-border transaction, there are a few areas which can present deal challenges, and which should be anticipated in advance by company and advisers alike.
Gaining access to buyers
Financial and contact information for overseas businesses can be extremely difficult to get hold of and determining how to gain meaningful access to a major international corporate can be challenging. Making first contact and gaining interest from an overseas buyer often requires local knowledge and networks and this is one of the reasons why HMT is part of ICFG, an international M&A corporate finance network of independent member firms with 125+ professionals working in 25 offices over the world.
Equally, as with large corporate acquirers in the UK, the boards of overseas acquirers will have clearly identified strategic and M&A objectives. Presenting an acquisition opportunity effectively so that, even with language differences, the fit is clear; is fundamental to getting a positive initial response. A single form of Information Memorandum might not serve to address the individual strategic fit for a range of overseas buyers.
Accepting longer response times
The process of making contact with an overseas buyer, of exchanging NDAs, of waiting while they deal with internal processes necessary to engage with a UK disposal opportunity, can be significantly longer than the equivalent process with UK trade buyers, and certainly longer than dealing with potential private equity buyers. It can take weeks even to get to a point where you can release the information memorandum to them.
This can make it difficult to align timescales between a range of potential acquirers across different jurisdictions. We often agree with our clients that we will approach key strategic overseas acquirers a week or two before going into the UK market so that all parties can get to the point of making indicative bids within the same timescale. We also advocate delaying the issue of process letters until we better understand the internal approval requirements of those key buyers, to ensure that our process accommodates them without demonstrably marching to their tune.
Even once you are in exclusivity, you may have to accept (through gritted teeth) that if the global board only meets once a month and its agenda is defined two weeks in advance, then key decision points in your deal might be reached more slowly than you and your advisers would like. It is unlikely that the sponsors of your deal will be able to convene the board or influence their agenda and this can be extremely frustrating, but is far from unusual.
Cultural Differences
Experience of cross-border M&A processes is helpful in building an understanding of how approaches tend to vary between nations. Any specific reflections on cultural norms will inevitably be a sweeping generalisation, but, for example, the typical directness and pace of US bidders in addressing issues contrasts markedly with the circumspection and indirectness with which a Japanese team might address the same issues. Similarly, when we advised on the sale of Basildon Chemicals to South-Korean chemical manufacturer KCC Corporation, observing cultural differences played a bit part in the process. For example, when exchanging business cards with a South-Korean professional, we had to present it with two hands and bow in sign of respect.
Language, by the same token, is rarely a big issue in a cross-border process. Fortunately for UK businesses, English is almost universally spoken and where it isn’t, it tends to be the buyer who deals with the problem. For example, we have recently disposed of a UK business to a Chinese buyer, where all contact was channelled through a US subsidiary and US advisers.
One language, two meanings
While we rarely need to try and transact in a foreign language, it is sometimes hard not to fall into the trap of thinking that we have an alignment of views where in fact the other side is interpreting the same phrase or clause in a different way. The agreement is an illusion! A classic case of this is the conventions around warranties in US deals. In the UK, the convention is that warranties are “promises” and the remedy for breach is a damage claim by the acquirer. In the US, exactly the same term conventionally means an automatically indemnified claim (ie they don’t have to go to court to collect).
Similarly in the US it is conventional to have a general retention in a deal – a significant sum which is held back to cover any warranty or indemnity claims. In the UK the convention is that retentions relate to specific, quantified issues. Much care must be taken by advisers to ensure that these points are clearly defined, debated and agreed before the deal goes into exclusivity.
Many Chinese and Japanese deals are advised by US advisers and it is safest to assume that US conventions lie behind their definitions.
Accounting and tax challenges
As with legal conventions, accounting and tax rules differ between countries and this can have a potentially material impact on the calculation of EBITDA. This can be particularly true for technology companies and IP-rich businesses where policies relating to revenue recognition and/or the treatment of tax credits can be substantially different.
Though it would not necessarily be practical to consider your accounts through the lens of every potential jurisdiction you might sell into, where there is a particular focus on a particular market it would be worth obtaining some headline insights as to what your profit and loss account and balance sheet might look like under that market’s GAAP.
Indeed, the really-well prepared will consider the impact of US GAAP (in particular) in designing key contracts, well in advance of sale.
Similarly things which are simple within a single tax jurisdiction can become complex when a deal structure needs to align two sets of interests. Structuring an employee incentive scheme for UK teams to benefit from US shares is a recurrent challenge, as is the fair way to reflect the change of status of R&D tax claims once a business becomes a foreign owned entity.
Practical considerations
Setting aside the technical and cultural challenges of a cross-border transaction, it is also worthwhile planning for the practical challenges it may present.
Pre pandemic, face to face meetings were an expensive and time-consuming element of an overseas deal. Just like any other buyer, foreign acquirers are keen to have “face-time” with the key members of the management team and to commit time to developing a practical implementation plan for after the deal is done. Whether you are going to them, or they to you, it is a mini G7. Appropriate accommodation must be suggested, restaurants booked, tours given and time committed to “getting to know you” sessions.
Virtual deal-doing during Covid-19 has pointed up the inefficiencies of big “all parties” in person meetings and there is no reason to believe that counter-parties will rush back to the way things were when Teams or Zoom based meetings are so much more efficient. However principal to principal meetings are another matter and if you are looking to engage with multiple overseas parties then you should ensure you have the capacity to set the necessary time aside.
Despite the challenges which cross-border acquirers layer on the business disposal process, the effort involved is often handsomely repaid through genuinely strategic valuation premiums. If there are overseas corporates that represent genuinely synergistic partners for your business then it is worth the additional effort and while valuation parameters are more aligned across the globe than you might imagine (we all have access to the same data on previous transactions!) once an overseas buyer commits to an acquisition target and gets their head around the value, they are often supportive, patient and relatively benign to do deals with.
Some of the very best multiples which we have achieved for our clients have been the result of cross -border deals and genuinely synergistic pairings. And as private equity valuations have increased over recent years to compete with UK trade buyers; so overseas trade valuations are now increasing in order to outbid PE !
Whenever we consider the potential acquirers for a client business, we explore whether overseas buyers are likely to come to the table with a winning bid. Disposal processes where we do not approach potential overseas acquirers at all are increasingly unusual.
As process norms around the world increasingly align, with the increasing ease of international communications, and with vast amounts of deployable capital available globally, those approaches are delivering more and more completed deals.
However, to deliver a completed cross-border transaction, there are a few areas which can present deal challenges, and which should be anticipated in advance by company and advisers alike.
Gaining access to buyers
Financial and contact information for overseas businesses can be extremely difficult to get hold of and determining how to gain meaningful access to a major international corporate can be challenging. Making first contact and gaining interest from an overseas buyer often requires local knowledge and networks and this is one of the reasons why HMT is part of ICFG, an international M&A corporate finance network of independent member firms with 125+ professionals working in 25 offices over the world.
Equally, as with large corporate acquirers in the UK, the boards of overseas acquirers will have clearly identified strategic and M&A objectives. Presenting an acquisition opportunity effectively so that, even with language differences, the fit is clear; is fundamental to getting a positive initial response. A single form of Information Memorandum might not serve to address the individual strategic fit for a range of overseas buyers.
Accepting longer response times
The process of making contact with an overseas buyer, of exchanging NDAs, of waiting while they deal with internal processes necessary to engage with a UK disposal opportunity, can be significantly longer than the equivalent process with UK trade buyers, and certainly longer than dealing with potential private equity buyers. It can take weeks even to get to a point where you can release the information memorandum to them.
This can make it difficult to align timescales between a range of potential acquirers across different jurisdictions. We often agree with our clients that we will approach key strategic overseas acquirers a week or two before going into the UK market so that all parties can get to the point of making indicative bids within the same timescale. We also advocate delaying the issue of process letters until we better understand the internal approval requirements of those key buyers, to ensure that our process accommodates them without demonstrably marching to their tune.
Even once you are in exclusivity, you may have to accept (through gritted teeth) that if the global board only meets once a month and its agenda is defined two weeks in advance, then key decision points in your deal might be reached more slowly than you and your advisers would like. It is unlikely that the sponsors of your deal will be able to convene the board or influence their agenda and this can be extremely frustrating, but is far from unusual.
Cultural Differences
Experience of cross-border M&A processes is helpful in building an understanding of how approaches tend to vary between nations. Any specific reflections on cultural norms will inevitably be a sweeping generalisation, but, for example, the typical directness and pace of US bidders in addressing issues contrasts markedly with the circumspection and indirectness with which a Japanese team might address the same issues. Similarly, when we advised on the sale of Basildon Chemicals to South-Korean chemical manufacturer KCC Corporation, observing cultural differences played a bit part in the process. For example, when exchanging business cards with a South-Korean professional, we had to present it with two hands and bow in sign of respect.
Language, by the same token, is rarely a big issue in a cross-border process. Fortunately for UK businesses, English is almost universally spoken and where it isn’t, it tends to be the buyer who deals with the problem. For example, we have recently disposed of a UK business to a Chinese buyer, where all contact was channelled through a US subsidiary and US advisers.
One language, two meanings
While we rarely need to try and transact in a foreign language, it is sometimes hard not to fall into the trap of thinking that we have an alignment of views where in fact the other side is interpreting the same phrase or clause in a different way. The agreement is an illusion! A classic case of this is the conventions around warranties in US deals. In the UK, the convention is that warranties are “promises” and the remedy for breach is a damage claim by the acquirer. In the US, exactly the same term conventionally means an automatically indemnified claim (ie they don’t have to go to court to collect).
Similarly in the US it is conventional to have a general retention in a deal – a significant sum which is held back to cover any warranty or indemnity claims. In the UK the convention is that retentions relate to specific, quantified issues. Much care must be taken by advisers to ensure that these points are clearly defined, debated and agreed before the deal goes into exclusivity.
Many Chinese and Japanese deals are advised by US advisers and it is safest to assume that US conventions lie behind their definitions.
Accounting and tax challenges
As with legal conventions, accounting and tax rules differ between countries and this can have a potentially material impact on the calculation of EBITDA. This can be particularly true for technology companies and IP-rich businesses where policies relating to revenue recognition and/or the treatment of tax credits can be substantially different.
Though it would not necessarily be practical to consider your accounts through the lens of every potential jurisdiction you might sell into, where there is a particular focus on a particular market it would be worth obtaining some headline insights as to what your profit and loss account and balance sheet might look like under that market’s GAAP.
Indeed, the really-well prepared will consider the impact of US GAAP (in particular) in designing key contracts, well in advance of sale.
Similarly things which are simple within a single tax jurisdiction can become complex when a deal structure needs to align two sets of interests. Structuring an employee incentive scheme for UK teams to benefit from US shares is a recurrent challenge, as is the fair way to reflect the change of status of R&D tax claims once a business becomes a foreign owned entity.
Practical considerations
Setting aside the technical and cultural challenges of a cross-border transaction, it is also worthwhile planning for the practical challenges it may present.
Pre pandemic, face to face meetings were an expensive and time-consuming element of an overseas deal. Just like any other buyer, foreign acquirers are keen to have “face-time” with the key members of the management team and to commit time to developing a practical implementation plan for after the deal is done. Whether you are going to them, or they to you, it is a mini G7. Appropriate accommodation must be suggested, restaurants booked, tours given and time committed to “getting to know you” sessions.
Virtual deal-doing during Covid-19 has pointed up the inefficiencies of big “all parties” in person meetings and there is no reason to believe that counter-parties will rush back to the way things were when Teams or Zoom based meetings are so much more efficient. However principal to principal meetings are another matter and if you are looking to engage with multiple overseas parties then you should ensure you have the capacity to set the necessary time aside.
Despite the challenges which cross-border acquirers layer on the business disposal process, the effort involved is often handsomely repaid through genuinely strategic valuation premiums. If there are overseas corporates that represent genuinely synergistic partners for your business then it is worth the additional effort and while valuation parameters are more aligned across the globe than you might imagine (we all have access to the same data on previous transactions!) once an overseas buyer commits to an acquisition target and gets their head around the value, they are often supportive, patient and relatively benign to do deals with.
Some of the very best multiples which we have achieved for our clients have been the result of cross -border deals and genuinely synergistic pairings. And as private equity valuations have increased over recent years to compete with UK trade buyers; so overseas trade valuations are now increasing in order to outbid PE !
