Logistics firms targeting acquisitions despite falling confidence

Close to half of logistics firms in the UK say that they are likely to make an acquisition over the next year, despite confidence among businesses in the sector dropping significantly over the past 12 months. With issues mounting in the sector, a new poll suggests that operators see M&A as a way to remain competitive and generate sustainable growth in a challenging marketplace.

In the latest edition of the Logistics Confidence Index from Barclays and BDO, close to 45 per cent of respondents reported that they were looking to make an acquisition over the coming year, with expanding their service offering and achieving economies of scale cited as the most common motivation behind M&A plans.

This figure represents the highest in the 10-year history of the confidence index report and points to an intensification of what has already been a busy period of dealmaking during a turbulent time for the logistics sector.

The state of affairs in logistics
The UK logistics sector has been under pressure for years now, as the rising cost of labour hit cash flows, fulfilment times were delayed by supply chain issues and a shortage of HGV drivers led to a scramble for talent. Over recent months, inflation has soared, while Russia’s war in Ukraine has pushed energy prices to new heights and worsened supply chain problems.

This has culminated in confidence among logistics operators falling precipitously over the past year. In the Barclays-BDO report, the sector’s confidence score fell to 50.4, down 12 points from the same time a year earlier.

A year ago, 62 per cent of firms predicted that their margins would improve over the coming year. In the latest report, this figure has fallen to just 45 per cent, with 30 per cent now anticipating that their profitability will drop over the next year, compared to 19 per cent a year ago. Clearly, this is a concern that has been exacerbated by the recent increases in inflation and costs. However, it is far from the only problem companies face.

The most pressing issue for logistics firms continues to be a shortage of talent, with 80 per cent of respondents saying that labour shortages will have a major impact over the next year. As well as affecting how efficiently companies operate, workforce shortages also mean increasing costs, as businesses vie for talent in a shrinking pool.

Drivers are the most sought-after and, over the last 12 months, advertised roles for HGV drivers qualified to drive the heaviest vehicles have increased, on average, by 25 per cent. Logistics companies are also increasingly competing for staff to work in warehouse, office and admin roles.

However, the report has also highlighted a sense of optimism among some firms, with 60 per cent expecting their turnover to increase over the next year, compared to just 25 per cent who expect turnover to decrease. As businesses seek to achieve this kind of growth, M&A is a key strategy (with the logistics sector remaining highly fragmented), as is investment in ESG.

53 per cent said that they would focus on employee welfare and wellness as a key ESG priority over the coming year, while 52 per cent plan to optimise the fuel of existing fleets, 44 per cent plan to introduce more eco-friendly lighting and power supplies in warehouses and 40 per cent will prioritise introducing or expanding their use of alternative fuel vehicles.

Why are companies targeting acquisitions?

Economies of Scale
The main challenge for the overwhelming majority of UK businesses across most sectors is rising costs and this is something that the logistics sector is perhaps uniquely exposed to. Logistics businesses are likely to see costs rising across the board: for labour, fuel, the energy required to operate huge warehouses and the price of doing business in the EU post-Brexit.

The idea that businesses can unlock cost savings by scaling up their operations (the economies of scale) has long been a driving force for M&A activity among companies looking to become more cost-efficient and it is one that many logistics operators are turning to in the present moment.

It is unsurprising then (as costs rise so steeply), that the most common reason for targeting acquisitions cited by businesses in the BDO/Barclays study was achieving economies of scale. 18.8 per cent of all respondents that took part in the study named it as their main motivation, which equated to 42 per cent of all businesses that said they were targeting deals.

Given the speed at which prices are rising, this will be an urgent consideration for many logistics firms and BDO/Barclays say that this will see the pace of M&A in the sector accelerate. Larger and medium-sized businesses could look to achieve the economies of scale through mergers with their direct competitors or through targeted acquisitions of smaller firms, many of which may be more susceptible or open to an acquisition given the myriad issues the logistics sector is facing.

Expand service offering
As costs rise and other challenges become more pronounced, logistics companies across the UK will be desperate to attract new customers (and retain their existing ones) to help grow their turnover and profit margins in an increasingly fraught market.

Companies polled in the BDO/Barclays study said that they would spend the next year targeting customers within their existing base (75 per cent), while half said that they would seek to win customers from their competitors.

According to 31 per cent of those surveyed, the best way to generate more business from both new and existing customers is through an expanded service offering, with 77 per cent saying that customers who had switched to their firm in the last year did so due to their improved service offering or value-added services (compared to 63 per cent in the 2021 study).

In general, M&A is the quickest and most effective way that companies in the logistics market can expand their service offering, with acquisitions enabling buyers to access customers in new sectors, accelerate their uptake of new technologies and, overall, offer a wider array of higher quality, better value services to new and existing customers. As a result, 17.7 per cent of all firms and 40 per cent of those planning acquisitions said that they would target deals in order to expand their service offering.

Gain higher margins
With confidence low amid the many headwinds impacting logistics firms, a priority for many will be securing higher margins. As a result, many of those looking to make acquisitions will specifically have this in mind and will target firms in areas of logistics that typically generate higher margins.

The BDO/Barclays survey found that gaining higher margins was the main driver behind M&A plans for 3.1 per cent of all businesses and 7 per cent of those that said they were planning acquisitions. Businesses seeking to secure higher margins through acquisitions are likely to look at the booming e-commerce sector, which has seen rapid and continuing growth since the COVID-19 pandemic.

According to BDO/Barclays, confidence in e-commerce logistics services stands at 51.9, compared to 50.0 in traditional contract logistics and 50.5 in road haulage services. Businesses with more exposure to these latter markets, which are seeing lower margins, could begin to target acquisitions in e-commerce areas such as courier services, express delivery and last-mile fulfilment.

The past couple of years has also seen intensifying competition to acquire commercial warehouse properties in prime logistics locations, such as on the outskirts of major cities and in the so-called “golden triangle” - a roughly 300-square-mile area in the West Midlands that is within a four-hour drive of 90 per cent of the population of Britain.

As more logistics companies seek higher margins by increasing their presence in the e-commerce space, it is possible that some will look to acquire these kinds of properties and develop their own operations, rather than (or perhaps alongside) targeting acquisitions of e-commerce focused businesses.

Tech uptake
Earlier this year, in a piece discussing how companies were responding to supply chain disruption through M&A, we looked at how technology was transforming the logistics industry and adjusting the acquisition strategies of companies in the sector.

As supply chain issues persist, it is vital that logistics companies operate as efficiently as possible in order to avoid harmful delays that could severely affect cashflow. Technology is playing a vital role in these efforts, with the global “digital logistics” market forecast to be worth around £36.5 billion by 2025, compared to £13.6 billion in 2020.

New and emerging technologies can provide better visibility and oversight, troubleshoot potential issues and improve decision-making and efficiency at virtually every stage of logistics supply chains. Machine learning tools can analyse huge amounts of data to produce accurate forecasting that helps firms manage and replenish inventory and cut errors, while AI and robotics can help to automate time-consuming tasks (both digitally and in warehouses), reducing labour costs, fulfilment times and errors.

Clearly, these are tools that can deliver huge benefits to the logistics firms that manage to secure them and acquisitions of disruptive logistics tech start-ups would seem to be the ideal way of tapping into these efficiencies. It is perhaps surprising, then, that increasing tech uptake was the motivating factor behind acquisition plans for just one per cent of respondents.

It is possible that the cost of acquiring firms that produce or use cutting-edge logistics tech could be prohibitive for some businesses. However, it seems likely that this is a trend that will continue to grow, with technology perhaps the best way logistics companies can respond to many of their current challenges.

Private equity backing
One major factor that could be encouraging many logistics operators to consider acquisitions is the huge influx of private equity investment that the sector is currently seeing. According to BDO, more than half of acquisitions in the UK logistics sector during Q2 2022 involved private equity investment and, as M&A in the sector accelerates, this is poised to increase.

With the logistics market remaining considerably fragmented, logistics companies that secure private equity backing could turbocharge their expansion and growth through buy-and-build acquisition strategies that enable them to expand geographically, extend their service offering and tap into the latest technologies in the sector.

In the second half of 2022, Leeds-based global tech-enabled supply chain firm Ligentia Group completed the acquisition of Polish Logistics firm VGL Solid Group, with backing from Equistone Partners Europe. The deal, which brought Ligentia’s revenues past the £1 billion mark, accelerated the company’s aim of expanding into new, fast-growing regions and sectors.

Commenting on the deal Equistone’s investment director Sebastien Leusch and director Chris Candfield said: "We are proud to support the board in this acquisition which enables the business to expand into new geographies and sectors, continue to innovate its technology and strengthen its position in a dynamic market.”
"The team have delivered exceptional growth over the last two years, including the launch of its US business, and we have been hugely impressed by the clear ambition to scale and build a diverse, customer-focused and responsive global supply chain management business."

Virginia International Logistics is a Cavan-based logistics firm that serves the food and beverage, pharmaceutical, industrial and manufacturing sectors. Having traded for 40 years, the company has grown to now operate a fleet of over 130 trucks, 400 trailers, as well as a 50,000 sq ft facility.
However, the business is targeting further growth and, in September 2022, secured funding from private equity firm MML Ireland to finance its future plans. With MML’s backing, the company is seeking to take advantage of market opportunities in order to grow both acquisitively and organically.

Virginia International Logistics Managing Director Ray Cole commented: "Given international delivery trends, the logistics sector continues to expand in terms of expertise and capacity, which creates market opportunities for well positioned and invested businesses.”

"I look forward to working with MML Ireland on our expansion plans. We are all ambitious for the company and intend to grow both organically and by acquisition. With its experience of working with dynamic scaling businesses, MML Ireland is the perfect partner for the next stage of our journey."

Geographic expansion
One potential method through which companies could secure growth and expansion is to target regional logistics firms in areas of the country which are perhaps more underserved than the most built-up parts of the UK.

Acquiring in this way could not only enable buyers to build economies of scale, but also to unlock growth in parts of the country in which competition is less intense and customers have fewer options (and potentially an unfulfilled appetite) for high-quality logistics services.

Drac Logistics is a Stoke-based logistics business that also operates an office with four staff members in Falkirk. As it sought to increase its presence in Scotland, the company struck a deal to acquire Aberdeenshire firm Caledonian Logistics, a 145-strong logistics business with a fleet of 90 trucks and facilities in Kintore, Cumbernauld, Inverness and Oldmeldrum.

Following the acquisition, Drac’s Falkirk staff will transfer to Caledonian’s Cumbernauld site, while the buyer will also establish a Caledonian Logistics container haulage division, with a £600,000 investment in an additional 10 vehicles and 14 skeletal trailers.

Commenting on the deal, Drac owner and CEO Alex Hayes said: “Caledonian Logistics has a fantastic name for service and that attracted us in the first place. Secondly, we have a strong Scottish customer base and do a lot of food products out of Scotland for European and overseas markets.”

“There’s a shortage of container transport within Scotland, like there is all over the UK and Europe. We’ve put in £600,000 investment as well as other cash to grow the business.”

Distress on the rise
Of course, increased M&A activity isn’t the only effect of the turbulence in the sector. As headwinds continue to mount, many companies will be in financial distress and facing a struggle to survive.

After the damage caused by COVID-19 and Brexit, issues such as rising costs, labour shortages and supply chain disruption will push many companies to breaking point and potentially insolvency. As fuel and energy prices rise and debt piles mount in the wake of COVID-19, distress in the sector is bound to increase over the coming months.

This is another factor that will drive dealmaking in the sector, as buyers with the appetite for cut-price deals find themselves in a position to acquire businesses that have previously been viable but fallen into distress as a result of the huge challenges they are facing.

In his book 'Arriving Today', Christopher Mims argues that supply chains that could be termed 'efficient' before the Covid-19 crisis were completely unprepared for major adverse events. We have just seen three of these events occur with some overlap: extreme weather, pandemics and wars. Mims argues that the inevitable consequence will be that supply chains will necessarily shorten, with more production either being brought in-house or at least closer to home.

We may, for example, soon see disruption in the Scottish fishing industry. Cod caught off the coast have traditionally been frozen and shipped to Asia for filleting, before being shipped back to Scotland. The labour cost is obviously much cheaper in Asia and the freight transport is very efficient. But for how long?

M&A in the logistics sector is clearly on an upward trajectory as the market undergoes a period of significant transformation, mirroring a broader theme of companies using M&A as a response to crises and upheaval.

A number of large mergers and acquisitions are likely to occur as bigger operators seek to boost their growth prospects and profit margins, while smaller firms may seek to take advantage of an influx of private equity investment to help them establish market share through acquisitions.

However, with the wide array of challenges in the sector continuing to intensify and many firms set to enter serious financial distress, perhaps the most pressing question is whether dealmaking in the UK logistics sector will be driven more by distress or a desire for growth.

See also: How companies can use M&A to tackle supply chain problems

Search for companies for sale that offer logistics-related services or heavily rely on logistics

Update: Logistics mergers and acquisitions remains lively

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