Partly as a response to flagging profits, a high amount of debt and negative cash flow, Ceva Logistics has reached an agreement with shareholders to turn a large share of debt into equity stakes, which will lead to lower interest payments and a cash injection. When this transaction is completed Ceva, which has been owned by private equity group Apollo Management since 2006, will have a new ownership structure with three primary shareholders on its board, including Apollo.

Ceva has also announced its unaudited results for 2012; while the logistics provider increased revenue by nearly 5% last year to more than €7.2.billion ($9.3 billion), its pre-tax profits fell nearly 22% to €251m. This decline included a 24.4% drop in profits for contract logistics.

Ceva’s chief executive officer, Marvin O. Schlanger, admitted the result “simply isn’t good enough” and pointed to actions to turn the business around, including the debt restructuring, a cost cutting initiative and the renegotiation or cancelling of poorly performing contracts, including for automotive.  

Less debt, more major shareholders
For the financial transaction, Ceva has come to an agreement with the majority of debt holders that will eliminate more than €1.2 billion of net debt in exchange for shares in the company. This arrangement will reduce cash interest payments by about 50%, or more than €135m per year, according to the company.

The agreement will also include a capital investment of around €205m by three investment groups, which will then become Ceva’s principle shareholders, according to Schlanger. These groups include Apollo, Capital Research and Management Company and a third group that Ceva will not name publically – but which is the logistics provider’s largest institutional investor.

The stake that each group holds in Ceva has not been revealed, but Schlanger told Automotive Logistics that Apollo, although lowering its share in the company, would retain a majority vote over the board. “But that does not necessarily reflect the respective ownership [of the three major shareholders],” he said.
According to Schlanger, the agreement will allow Ceva to make further investments in new markets and services. “This gives us a much stronger balance sheet and will enable us to grow and better position us to make capex [capital expenditure] investments for our customers,” he said.

IPO pulled, but still the objective
The move can be seen both as an effort to improve Ceva’s cash flow – which was negative in the amount of €241m in 2012 – as well as another step in what has become a bumpy road toward Ceva becoming a publically listed company.

Since Apollo bought and rebranded TNT’s logistics division in 2006, and combined it in 2007 with US-based provider EGL, Ceva has carried a large amount of debt, with significant interest costs to service it. Many of Ceva’s note holders carried interest of 12% or higher. In January 2012, Apollo also carried out a debt for equity swap, while issuing more than $800m in high-yield bonds. The move was intended to reduce Ceva’s debt burden, and prepare it for an initial public offering. The company subsequently filed for an IPO in May, saying at the time that it hoped to raise $400m. 

However, Schlanger admitted to Automotive Logistics that this refinancing did not go far enough, and did not substantially lower interest rates for Ceva. The company’s net financing costs rose from €225m in 2011 to €284m last year.

“One of the major difference between this transaction and the previous one last year is that when it is complete we will have reduced our net cash costs by €135m a year,” he said.

As part of the restructuring, last week Ceva withdrew its filing for an initial public offering. Although a stock market debut has now been delayed indefinitely, Schlanger said the present withdrawal was “simply an administrative item” necessary to complete the recapitalisation project. The company’s aim is still very much to go public, he said.

Need for ‘clean up’ in contract logistics
While a lower debt ratio should make Ceva more attractive in a future public offering, any IPO would depend on the strength of its financial performance. With the downturn in southern Europe, poor air freight volumes and a shrinking profit margin, Ceva’s 2012 results were decidedly mixed.

Although the general weakness in freight forwarding had been expected, particularly for air freight, more surprising was the decline in profits for Ceva’s contract logistics business. Stronger growth in markets where Ceva has a strong presence, including North America, Brazil and China, was not enough to offset issues in Europe, said Schlanger.

Besides the obvious weakness in markets like Italy, where Fiat is an important customer, Schlanger also pointed to a particularly weak retail market in the UK. And while Ceva has recently gained more automotive business in markets such as Germany, he said that its business there “was not as strong as we would like”.

Schlanger admitted that profitability had declined in China too, where Ceva has significant operations, including its stake in Anji-Ceva, a joint venture with Chinese carmaker SAIC. Freight forwarding from China to North America has also been weak. “The market in China has perhaps been a little bit tougher than it had been, but we like our position there and expect it to continue to grow,” said Schlanger.

Furthermore, it would appear that there have been problems with a number of Ceva’s contracts. As Ceva initially pointed out late in 2012, the company has been renegotiating or cancelling a number of “underperforming” agreements. Schlanger said that the company has made progress in this regard but that it would not be reflected in its results until this year.

Schlanger also acknowledged that there had been some “one offs” that Ceva “needed to clean up” around the world. “The US and Asia has been strong, and Brazil has been pretty strong. But we had some contracts that we had to work on and decided not to renew under old terms,” he said.

Schlanger said that details over these contracts would be published in due course, and it was unclear if the issues were purely financial or if there had been some operational problems as well. The company has seen a recent management shakeup, including the departure of former CEO John Pattullo and COO Bruno Sidler in the last six months.

Schlanger pointed to the debt restructuring, along with a previously announced cost reduction programme, as important steps towards improving Ceva’s profitability. He also said that the company’s strong presence globally, including in Mexico where automotive production is resurgent, should present further opportunities for growth.