(CHRW) C.H. Robinson Worldwide to Buy Phoenix

One of the leading third party logistic companies, CH Robinson Worldwide Inc. (CHRW) is set to buy Phoenix International, Inc. for $635 million.

Phoenix International is a U.S. based privately-held global freight forwarding company that primarily deals in ocean freight along with other services like air freight and custom brokerage. The company has 76 offices across 125 countries and serves approximately 15,000 customers.

The deal is expected to close in late 2012. No deal terms have been disclosed yet but CH Robinson would split the payment into cash and equities. The company expects to pay approximately $571.5 million in cash and approximately $63.5 million will be paid through newly-issued stock of the company.

The uncertain market scenario in the truck brokerage industry is one of the key factors responsible for CH Robinson’s focus on other market opportunities. Capacity issues coupled with rising third party carrier cost in truck shipments are forcing the company to look beyond its conventional truck brokerage services.

We believe that the company is facing stiff market conditions in the form of intense competition and capacity constraints in the truck market, resulting in a continuous decline in net revenue margin. The company’s transportation net revenue margin is at a record low and is likely to further deteriorate if supply costs continue to rise at a faster rate compared to price recoveries. The prevailing economic condition has forced shippers to follow aggressive cost management strategies within their supply chain, thereby making them unreceptive to price increases. As a result, the company is struggling to pass on higher transportation costs to customers, resulting in lower profits.

At the same time, we would also like to point out that near-term outlook on ocean and air freight is not very attractive. We believe uncertainty over ocean freight is likely to persist as ocean liners are unlikely to offer any volume discounts, leading to higher freight rates that will affect freight forwarders’ purchased transportation cost. On July 11, 2012, 15 ocean carriers operating in the eastbound Asia-to-U.S. trade represented by the Transpacific Stabilization Agreement (TSA) announced their largest rate increases for 2012.  Effective from August, rate increases include $500 per forty-foot equivalent unit (FEU) to the West Coast and $700 to all other U.S. destinations. The increases on refrigerated imports range from $1,000 to $1,250. TSA members have also raised freight rates ranging from $1,000 per-FEU to $1,250 per-FEU on refrigerated imports for Asia-West Coast services, effective August 15. The hikes represent the fifth increase in the eastbound trans-Pacific freight rates since January 1, 2012. Going forward, the air freight industry outlook remains subdued due to a sluggish economy and lower market demand.

Further, we believe international air and ocean freight forwarding and customs brokerage are intensively competitive and are expected to remain so in the foreseeable future. There are a large number of entities competing in the international logistics industry like Expeditors International of Washington Inc. (EXPD). Historically, the industry has experienced consolidations into larger firms striving for stronger and more complete multinational and multi-service networks. In addition, regional and local brokers and freight forwarders also remain a competitive force.

Given the current outlook of the freight forwarding industry, the near-term synergies arising from this deal is expected to remain modest. However, given Phoenix’ strong global footprint and financial performance, with revenues of approximately $807 million and adjusted operating income of approximately $48 million, the deal signifies potential long-term benefits.

We are currently maintaining our long-term Neutral recommendation on C.H. Robinson. For the short term, the company holds a Zacks #3 Rank (Hold).

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