Wherever CEVA Logistics heads from here, there is little doubt the world’s fifth-largest third-party logistics company is in for a significant transformation. In many ways, that’s already under way, with a new strategic mission and recapitalization plan forming the basis of an uncertain future.
That uncertainty revolves around an 18-month stretch during which the company reported dismal earnings, withdrew an initial public offering, endured crushing debt and was downgraded by credit agency Standard & Poor’s. Investors led by Apollo Global Management, CEVA’s private equity owner, undertook two debt-for-equity swaps.
Over the past several weeks, industry analysts offered grim prognoses amid rumors of possible bankruptcy. That talk has quieted with the most recent debt-for-equity swap and recapitalization plan announced on May 2.
The logistics world is watching. Netherlands-based CEVA is the world’s second-largest non-asset-based 3PL and largest automotive logistics provider, with 2012 revenue of about $9.2 billion. CEVA operates in 170 countries and has more than 50,000 employees worldwide, according to research analyst and consultant Armstrong & Associates.
Still, CEVA CEO Marvin Schlanger is optimistic. In an interview with The Journal of Commerce, Schlanger, who replaced former CEO John Pattullo last October, described the current recapitalization plan as a transformational event that will make CEVA a much stronger competitor.
In the meantime, it’s business as usual. “The transaction positions CEVA to better serve our customers and develop new supply chain solutions and services to meet their needs,” Schlanger said.
CEVA filed for the $400 million IPO with the New York Stock Exchange last May. The company withdrew the offering last month, citing falling profits. Although CEVA’s revenue rose almost 5 percent year-over-year in 2012, overall adjusted earnings before interest, taxes, depreciation and amortization dropped 21.8 percent to $322.4 million.
Within days of the IPO’s withdrawal, S&P lowered CEVA’s corporate credit rating from “B minus” to “SD,” Selective Default, saying the company’s failure to meet financial obligations was tantamount to default and cited the risk of bankruptcy in lieu of a refinancing plan.
The debt-for-equity swap, announced quickly after the IPO’s withdrawal, wiped out 1.3 billion euros ($1.7 billion) in CEVA’s consolidated debt and about 135 million euros in annual cash interest costs. Investors also agreed to inject 230 million euros into CEVA’s logistics business.
The deal with Apollo, Capital Research and Management, and an institutional investor who hasn’t announced its participation follows a $1.1 billion debt-for-equity swap in early 2012 that Apollo initiated in advance of the planned IPO.
Schlanger doesn’t flinch from identifying internal factors that contributed to CEVA’s poor earnings. He brings an understanding of the business and investment side to the company’s recovery efforts, having served as president and CEO of ARCO Chemical and run many global businesses. Schlanger is also a principal of Cherry Hill Chemical Investments, a provider of capital and management services to the chemical and allied industries. He has been with Apollo for 15 years in executive and board roles.
CEVA, like many 3PLs, has been hammered by the global economy, especially the European credit crisis. “Europe continues to decline,” Schlanger said. “It’s been a problem for us and others.”
Amid economic uncertainty and weak consumer demand, shippers are shifting from air freight to ocean, lowering profits for many forwarders. CEVA, which derives its revenue from contract logistics and freight management, was hit hard by the modal shift. Adjusted EDIBTA for freight management declined 17.7 percent for 2012 compared to 2011, while adjusted EDBITA for contract logistics fell 24.4 percent.
Internal cost structures, contract performance and a legacy dating from CEVA’s founding have contributed to the company’s woes. An enterprise-wide effort is under way to reduce overhead costs and improve contract performance. Some 1,500 jobs Schlanger described as not creating value have been eliminated, with 300 more to follow.
CEVA also is reviewing logistics contracts, shedding or renegotiating underperformers. “We have a way to go, but we’re well down the path,” Schlanger said.
The company’s challenge dates to 2006, when Apollo bought CEVA, then the contract logistics division of TNT NV, for $1.9 billion. The following year, Apollo acquired EGL, a Houston-based freight management company for $2.2 billion, and incorporated it into the CEVA brand.
TNT’s business was heavily tied to the sluggish, at best, southern European automotive sector. Moody’s Investors Service forecasts western European light vehicle demand will contract 3 percent this year because of weaker markets in southern Europe, particularly Italy.
EGL had a huge business in computer imports from Asia. The shift in consumer demand from computers to mobile devices forced 3PLs to reconfigure their supply chains, a formidable challenge. “Our legacy businesses were over-weighted in certain elements of industry that frankly are not great performers at the moment,” Schlanger said.
His strategic vision would take CEVA beyond its legacy as a hybrid of TNT-EGL. Building on existing global scale and world-class capabilities, Schlanger envisions a company the market recognizes as an end-to-end supply chain services provider, with a value proposition covering the breadth of 3PL services and extends the length of the supply chain.
“We want to show our customers how to save money end-to-end, not just with freight management or contract logistics,” he said.
CEVA is expanding its Supply Chain Solutions group, an internal organization launched in 2011 to provide global customers with end-to-end solutions. General Motors was an early user of the service, which can uncover savings of 5 to 15 percent through process improvements. “We have great control tower operations around the world,” Schlanger said.
With the recapitalization plan in place, Schlanger knows ultimate responsibility for CEVA rests on his shoulders. “It is now in the hands of CEVA management to demonstrate the full potential of the company,” he said.
Veteran 3PL industry analyst Dick Armstrong, president of Armstrong & Associates, isn’t convinced the Apollo-CEVA pairing bodes well for CEVA’s long-term health. Not enough money is being channeled back into CEVA to allow it to remain competitive, he said. Operational imperatives may be taking a backseat to other private equity concerns.
As a result, CEVA isn’t in control of its own destiny. “CEVA doesn’t have the money they need to operate and innovate,” Armstrong said.
Apollo declined to comment for this report.
CEVA remains a great company despite its challenges, with the resources and capabilities to emerge stronger. Armstrong’s rankings of top global 3PLs describes CEVA as having excellent logistics operations, very good capabilities in value-added support activities and a strong software infrastructure. CEVA’s main vertical industries include automotive, consumer/retail technology, industrial and energy.
Globally, revenue is derived mainly from the Americas, Asia-Pacific and northern Europe. Key customers include Andersen Windows, Daimler, Eaton, Fiat, Ford, General Motors, Hewlett-Packard, Michelin, Mitsubishi Motors, Petro-Canada, Renault and Sears.
Armstrong would like to see more midmarket companies among CEVA’s clients. They tend to be more profitable than the Fortune 100 companies that make up the bulk of CEVA’s business. “Especially if you are a tactical provider,” he said, “the Fortune 100 companies can really squeeze you on the margins.”
Contact David Biederman at firstname.lastname@example.org.