Caterpillar, the $42 billion equipment manufacturing giant, aims to cash in on an increasingly strong recovery in third-party logistics by selling a portion of its $2.2 billion Caterpillar Logistics Services unit.
The Peoria, Ill.-based company wants to separate its external third-party business from its internal logistics and parts distribution network, keeping control of the latter while possibly putting the former up for sale.
Even a partial sale of Caterpillar Logistics Services would be one of the biggest logistics spinoffs since IBM sold its logistics operations to Geodis in 2009. That deal gave the French logistics operator more than $1.4 billion in new business.
Caterpillar would be in a strong position as a seller. Cat Logistics is expanding its overseas reach and adding revenue as Caterpillar itself sells more machinery, equipment and engines in developing and industrialized markets. The company expects revenue to rise more than 19 percent this year, topping $50 billion, as sales increase.
That begs the question: Why sell even part of a successful logistics operation?
The answer in part is that Caterpillar is a manufacturer, not a service company. Further, as machine, equipment and parts sales rise, logistics and other integrated service units represent a smaller portion of Caterpillar’s overall revenue.
“Given Caterpillar’s increased focus on the significant growth opportunities in its core businesses, the company has decided to consider its options for the future of this business,” said Steve Larson, president and CEO of Cat Logistics.
Those options include the sale of the third-party business or its restructuring as an independent subsidiary within Cat Logistics, according to Caterpillar. Bank of America Merrill Lynch and Robert W. Baird & Co. will advise the company.
But there’s also money — lots of it — in Cat’s external customer supply chains, and plenty of investors are drawn to the growth potential that logistics offers.
Late 2010 saw several logistics and transportation acquisitions, as operators large and small regained enough revenue and profit to attract buyers. “There’s a lot of pent-up financial capital sitting on the sidelines,” Chris Wofford, head of transportation and logistics at Macquarie Capital, said in December.
Wofford last year helped arrange one of the largest logistics mergers in several years, the $512.6 million purchase of ATC by GENCO Supply Chain Solutions.
Caterpillar is offering potential investors a big opportunity. Cat Logistics is the seventh-largest U.S.-based 3PL ranked by revenue, according to SJ Consulting Group.
In terms of total square footage —29 million — Cat Logistics is the fifth-largest contract warehousing company in the U.S., Armstrong & Associates said.
About half of Cat Logistics’ $2.2 billion in revenue is believed to come from external business, said Richard Armstrong, chairman and CEO of the Stoughton, Wis.-based logistics consulting firm.
“This is a big deal,” he said. He estimates Cat Logistics’ external third-party logistics revenue at $700 million to $1.1 billion a year.
Whether the manufacturer decides to sell may depend on how difficult it is to divide the external 3PL services from the internal logistics network that supports Caterpillar’s core operations. “I don’t know what the mechanism is going to be to separate this stuff,” Armstrong said. “I would expect there’s going to be an awful lot of overlapping facilities” at Cat Logistics’ global warehousing locations.
Where there’s a will — and a suitable offer — Caterpillar is likely to find a way. The company may be able to resolve some “overlap” issues through leaseback arrangements or service agreements with potential buyers, for example.
Some facilities, such as the Clayton, Ohio, distribution center scheduled to open this year, won’t be affected. The Ohio DC is dedicated to Cat’s parts distribution system, and wouldn’t be part of any sale, the Dayton Business Journal reported.
Cat Logistics serves more than 50 external customers worldwide, according to the manufacturer. In recent years, Cat Logistics has expanded its global reach.
The subsidiary is building a 450,000-square-foot parts distribution center in Dubai. Distribution centers opened in Shanghai in 2006 and in Moscow in 2007. And last fall, Cat opened a 9,000-square-foot logistics center in Suzhou, China, to support Caterpillar’s expanding manufacturing footprint in Asia.
Contact William B. Cassidy at email@example.com.