European Logistics Sector Becomes Hot Spot for Deals

WSJ - Deal activity in Europe's logistics sector is heating up, as United Parcel Service Inc.'s purchase of smaller rival TNT Express NV last month demonstrated that players in this industry are starting to spend.

The €5.16 billion ($6.75 billion) move by UPS to ramp up its operations in Europe through the largest deal in its 105-year history has created a parcel shipper ith more than $60 billion in annual sales and places considerable pressure on arch rival FedEx Corp.

FedEx earlier this month bought privately held Polish shipping pany Opek in order to push its European expansion plans. Financial details of the transaction eren't disclosed, but FedEx said the purchase gives its express-shipping business access to a ground netork in Poland ith an estimated $70 million in annual revenue.

Analysts said the recent deal activity suggests that cash-rich panies in the logistics sector are looking to put their money to ork. Investment bank Morgan Stanley noted that prospects for an increased level of merger and acquisition activity across all sectors are reasonably good in Europe. They cite healthy balance sheets and cash flos for European panies, return on equity that is above historical averages as ell as higher share prices.

And, according to analysis by advisory firm KPMG, the bined value of all pleted and announced deals across the globe in the first quarter of 2012 totaled $27.9 billion, larger than in any of the previous four quarters. KPMG's European head of transport transactions, Steffen Wagner, believes Europe is set to be at the center of M&A activity in the highly fragmented logistics sector.

As global trade and particularly e-merce continues to increase, and supply chains bee ever more plicated, the role of logistics specialists is increasingly more important. "Opportunities [for deals] ill be in temperature-sensitive transport and food logistics, pharmaceutical and chemical logistics and the transport of hazardous products," Mr. Wagner added.

With that in mind, money managers advise investors to seek exposure to the logistics sector, picking panies that are best placed to offer attractive returns and seek strategic acquisitions this year.

Tim Stevenson, manager of Henderson Global Investors' pan-European equity fund, said he ons shares of German pany Deutsche Post AG, DPW.XE -0.46% operator of DHL, the orld's largest air-courier pany, Siss logistics group Kuehne & Nagel KNIN.VX -9.49% and Danish transport and logistics giant A.P. Moller-Maersk AS. All trade on lo valuations ith high, sustainable yields, he said.

"The stocks tend to perform as a multiple of economic groth, as investors have bee increasingly cautious on the European region and these stocks have tended to be eak. Hoever, hat those investors forget is that these panies have global exposure here e think economic groth ill remain robust," he said.

He noted the Asian region, here Deutsche Post's DHL business has a roughly 40% market share in logistics. "In addition, [these panies] in recent years have sold off noncore operations to create more profitable entities. For these reasons, e vie the stocks as good investments."

Like Mr. Stevenson, David Moss, F&C Asset Management's director of European equities, also ons Deutsche Post stock. Mr. Moss said that as one of the four remaining global logistics and supply-chain players, DHL is a major inner ith major investment in emerging markets, meaning that rising volumes ill lead to higher returns.

"Deutsche Post is also very ell placed domestically for the groth in parcel traffic from e-merce groth," he said.

Since the start of the year, shares in all three panies have risen more sharply than the overall market. Deutsche Post has gained 18%, Kuehne & Nagel has added 13% and Moller-Maersk is up 9%.

All three could rise further this year, but the outlook is largely dependent on a bination of factors. These include economic groth, M&A appetite of strategic investors and pressure from shareholders to invest the cash or return it to them, said KPMG's Mr. Wagner.