Feb 19, 2015

KWE acquires APL Logistics, reinforcing business base in automobile, retail industry

Satoshi Ishizaki, president of KWE

Kintetsu World Express, Inc. (KWE) announced on Feb. 17 that it has entered into an agreement with Singapore-based Neptune Orient Lines. Ltd. (NOL) for the acquisition of all shares in APL Logistics (APLL), the logistics subsidiary of NOL. Total acquisition price of the shares came to about Y144.2 billion, including the advisory costs. With the purchase of APLL, sales of KWE Group will balloon to surpass Y500 billion. KWE will also boost its presence in the market, raising its position as an international logistics service provider to around 18th spot from its current mid-20s ranking. Vehicle and retail-related segments, APLL's forte, are the industry areas that had been major issues for KWE in recent years. As such, APLL's acquisition will help KWE reinforce its customer base in these areas. KWE also expects to reap synergistic effects by linking its forwarding business with APLL's order management and other value-added services.

Satoshi Ishizaki, president of KWE, and other top executives held a press briefing on Feb. 18, where they explained the background/target of acquiring APLL, the synergistic effects with the latter, and other matters related to the transaction. On the background of the acquisition, Ishizaki explained that, "In our midterm business plan, we mapped out a goal 'to structure a management base on which we can compete equally with Western competitors in the global market', and we have been exerting efforts toward this goal. However, we currently post sales of just slightly above Y300 billion, putting us in a lukewarm position. It would take time to grow (to the scale on a par with Western major players) on our own, so we have been exploring enterprises for mergers and acquisitions (M&A) that can generate synergies for us." He added that, "APLL focuses on value-added services such as PO management and buyers' consolidation, and majority of its customers are in automobile and retail industries (which KWE targets at). As a company that meets our "ideal state", we have been approaching top executives of APLL since summer of 2013 regarding partnership and investments. At the turn of 2014, NOL informed us of its plan to sell APLL. We submitted a bid to win the tender at any cost, and on Feb. 16, 2015, we were informed of NOL's intention that it hopes to sell APLL to KWE. We initially thought of acquiring just a majority share in it, but NOL was determined to sell 100% equity in APLL, so we agreed on the acquisition of all shares."

When estimated full-year results of KWE in fiscal 2014 and APLL's business results in fiscal 2014 are simply combined, the acquisition will result in sales of Y500 billion, operating profit of Y23 billion and net profit of slightly more than Y15 billion. Ishizaki aims to expand the sales to Y600 billion and net profit to Y20 billion within several years.

As for component ratio per division, region and industry of KWE in fiscal 2013 and its component ratio after the acquisition of APLL, it can be said that the two companies will have an ideal complementary relationship as the acquisition of APLL will lead to improvements in the ratio of automobile and retail services that had been major issues for KWE, which is highly dependent on electronic/electric appliances and air forwarding. Also, the ratio of marine and logistics services will be improved. "With this move, we will be able to solve the problem we have thus far been struggling with," projected Ishizaki. APLL has major U.S. shippers as its customers, but many of its services in other regions are also settled in the U.S., the ratio of North America has become bigger than its actual workload.

Marine cargo handlings of APLL as an NVOCC are not disclosed, but it is estimated to account for about one-third of KWE’s throughput. When the estimated value of APLL is simply added to the 360,000-TEU throughput of KWE in fiscal 2013, it would amount to a little less than 500,000 TEUs, thereby catapulting it into second largest Japanese-affiliated NVOCC.>

Other salient remarks made by Ishizaki at the press briefing are as follows:

* (On synergistic effects) KWE has its strengths in air/sea forwarding. APLL is strong in PO management, contract logistics and so on. By building seamless services, such as offering APLL's value-added services to customers for whom we handle forwarding only, we will be able to strengthen our relationship with customers. By integrating businesses of both parties and coming up with new services, we will switch 1+1 format to 2+alpha, and further expand our business scale.

* Our largest investment thus far was up to around Y4.5 billion, but this deal is a huge investment with a different range of digits (above Y140 billion). It is our belief that synergistic effects will certainly be generated from this transaction. With adequate preparations, we will skillfully team up with APLL in order to boost the presence of KWE in the industry. The (yen-converted) acquisition price has swelled due to the weak yen trend, but if this trend prevails, our returns will also balloon. There are issues such as the depreciation of goodwill, but if we take APLL's growth potential into account, we do not think it is an excessive investment (reported to be $800-900 million).

* (APLL's corporate culture) We felt that they gave sincere efforts for the business. Its employees also have a strong sense of responsibility, they work hard to achieve the targets they have raised for themselves, and they have a strong profit mind. In this sense, they have a similar corporate culture as KWE. As long as we respect their position and treat them as equals, I think we would be able to fuse together without any major problems.

* Even after the integration, figures for the EMEA (Europe, Middle East and Africa) region will remain at a little above 10%, but we are in the era when Asia accounts for 60% of the global cargo volume. Forwarders in Europe and the U.S. also value Asia, and Asia and Asia-Americas will be the center of logistics. With forwarding in particular, the share of ex-Asia U.S.-bound cargoes is still small and we hope to raise this ratio.

[APL Logistics]

Pioneering procurement logistics, keeping brand

KWE is currently awaiting the necessary approvals from the antitrust authorities at each country concerned, aiming at acquiring APLL shares by June 2015. For the time being, KWE will operate APLL as an independent operation unit without changing its current management team, though it will dispatch its executives. KWE has also obtained NOL's permission to keep using APLL brand. "Its relationship with customers is very close, so there is no need to force integration. We are not considering to abolish or merge hubs either and we will not cut workforce," said Ishizaki.

With American Consolidation Services (ACS), the logistics division of U.S.-based APL (acquired by Singapore's NOL in 1997), as its parent company, APLL debuted in the market in 1998 in the form of integration with NOL Group's logistics division. Former ACS had a pioneering presence in buyers' consolidation segment and its client list includes major logistics providers in the U.S. and other leading companies even today. It acquired U.S.-based logistics major GATX Logistics and Germany's Mahle in succession, thereby widely expanding its business lineup. It also possesses strong business foundations in Asia by setting up China's first 100% foreign-funded international forwarding company in 1988.

APLL's business lines are made up of international logistics services (ILS) such as PO management, buyers' consolidation and forwarding; intermodal and trucking logistics (ITL) such as milk run services for automobile industry centering on North America and border hauls between the U.S. and Mexico, and contract logistics services (CLS) such as inventory management. Their sales ratios currently stand at 43%, 37% and 20%, respectively.

According to NOL, the in-group transactions of APL and APLL amount to about $70 million. On the effects of APLL's split from the group, Ng Yat Chung, CEO of NOL, commented that, "The relationship of APL and APLL has been an arm's-length kind of relationship (fair relationship wherein they are not given special treatment as a group company). They mutually give high value, so they will probably continue their strong business relationship from here on as well."

Meanwhile, Yoshinori Watarai, senior managing director of KWE in charge of group management strategy, claimed that, "For APLL, APL is a second vendor. KWE has long had dealings with APL as an operator. By partnering with APLL and building a stronger relationship, we hope to offer better services to the customers."

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