Want that Deal? Let Your Stock Price Do the Work

(Bloomberg Opinion) -- Under-managed companies are a goldmine for skilled buyers. The only wrangle can be over how to divide the spoils.

Take Panalpina Welttransport AG. After several months of tussling, Danish rival DSV A/S agreed on Monday to buy the Swiss logistics group for 4.6 billion Swiss francs ($4.6 billion). The terms give the target's shareholders a big slice of a much larger pie – but aren't quite as generous as they first appear.

Panalpina's operating margins trail those of its rivals, a sign the group has been poorly run for a long time. Having almost 50 percent of its shares owned by a philanthropic foundation hasn't helped. Activist investor Cevian recently came on board and has been agitating for change. DSV is now going to finish the job.

The Danes started by offering a mix of cash and stock. Panalpina's defense involved looking at alternative tie-ups, prompting the bidder to make an all-cash proposal. Now the pair have finalized an all-share deal. Rather than cash out, it's clear the Ernst Goehner Foundation wanted to stay invested after all.

The terms give Panalpina shareholders a 43 percent premium to what their shares were trading at in mid-January before reports of the bid emerged thanks to the huge uplift in DSV's stock over the period.

But their 23 percent stake in the combined company isn't quite as generous as it looks. Crunch the duo together at the firms' combined market capitalizations in January and Panalpina holders would have got 20 percent.

The larger DSV has effectively conjured up a premium by getting the market to price in the future value creation – the combined value of the companies is $3.4 billion more than what it was before the talks started. DSV shareholders have enjoyed most of that gain.

The value share may be fair; the question is whether it's achievable. DSV reckons it can pump up Panalpina's operating margin of roughly 2 percent up to its own 7 percent level, all other things being equal.

That's not implausible given Panalpina's business mix is tilted towards DSV's most profitable activities. It implies about 300 million francs of annual cost savings. Even so, taxed and conservatively capitalized, they aren't worth the increase in the two companies' market values. Investors seem to be hoping for even more.

The bar for a gatecrasher is high, though. DSV is paying a steep multiple of earnings, and hasn't got a steal. But if it is overpaying, it is doing so in frothy stock.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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