As Automotive Logistics was going to press, PSA Peugeot Citroën announced that it had entered into exclusive negotiations with Russian Railways (RZD), the state-owned rail operator, to sell a majority stake in PSA’s logistics provider, Gefco, and form a “strategic partnership”. PSA said that it would sell a 75% interest for €800m ($1.03 billion), after Gefco pays the group €100m in a special dividend.
While few details could be obtained immediately, PSA said that Gefco’s management would not change, with Luc Nadal continuing to serve as president, and that the provider would remain headquartered in France. PSA said that it expected the deal to accelerate development for Gefco not only in Russia, but also in Asia, Eastern and Central Europe.
The agreement will be subject to antitrust authorities, while Gefco will enter into a consultation with its works council to discuss the offer.
The proposed deal with RZD follows PSA’s decision earlier in the year to sell a stake in Gefco, which had record profits in 2011, in an effort to raise cash for its struggling automotive unit. American and French private equity companies were initially touted as the frontrunners, while it was only in September that it emerged RZD was also making a bid (at PSA’s request).
The other bidders were reported to have been Platinum Equity; the Gores Group; PAI; and a team of two companies, CVC and AXA Private Equity. Early sources had suggested that PSA would sell as much as 90% of Gefco for close to €1 billion.
Given the OEM’s financial plight, sources familiar with the deal had suggested that PSA would choose the winning bid on little more than the highest price.
One win longer than another
It is too early to speculate on the future strategy of an RZD-controlled Gefco, but the two companies do appear to have complimentary networks, assets and ambitions, with Gefco looking to expand its total offering in Russia, Central Asia and the Far East, and Russian Railways seeking further diversification into the logistics business. RZD already has controlling stakes in the intermodal provider Transcontainer (although it has been selling shares) and the finished vehicle rail provider RailTransAuto. Gefco uses Transcontainer to move freight from Asia on the Trans-Siberian railway for Peugeot production in Kaluga.
Vitaly Belskiy, a consultant at Frost and Sullivan, called the deal a “winwin” for both RZD and PSA, however he qualified that the win for RZD would be more long term than would be the equity gain for PSA. Calling the purchase of Gefco a potential “one-time opportunity” for RZD, he said it should secure the company’s long-term position in the logistics market.
“Russian Railways has set itself a strong target of increasing cargo turnover by 28% in both Russian and external markets by 2015 [compared to 2009],” said Belskiy.
RZD has also been taking steps towards privatisation; the FT has reported that plans are being drawn up to sell a minority stake in Russian Railways for 2015 or 2016 in a potential London initial public offer.
While not immediately available for comment, Gefco’s management seem likely to support the deal. At a press conference this summer, Nadal said that Gefco would work well under a foreign logistics provider.“The goal is for Gefco to develop its international ‘B2B’ network and services,” he said. “From this point of view, a large Asian, American or Russian logistics company would pose no difficulties, nor would a private equity investor looking to develop the company.”
Big questions for big customers
Although its earnings have fallen this year, Gefco has remained solidly profitable despite PSA’s wider problems. In January it officially takes over as the exclusive fourth-party logistics provider for General Motors in Europe and Russia, which is likely to include absorbing many of the current Opel/ Vauxhall logistics management staff.
In the long term, Gefco’s new shareholder will ultimately have to contend with any future changes to Gefco’s arrangements with PSA and GM. Its contract with GM already has a period of exclusivity, while it seems likely that something similar has or will be arranged with PSA. In a statement, the carmaker said that a shareholders agreement would “ensure the protection of both parties’ interests as well as the sustained quality of the logistics services provided by Gefco to the [PSA] Group”.
While such exclusivity offers insurance in the short term, it raises questions over what could happen after these contracts expired. Such uncertainty beyond a 3-5 year period may have made private equity investors, who tend to own companies for a similar length of time, wary about paying more for Gefco.
The pricing terms of such contracts are another question. While Gefco’s contract with GM is unprecedented in its scale and scope, and should boost Gefco revenue by 20%, Nadal indicated that much of its success would depend on Gefco’s ability to find efficiencies with Peugeot and other customers. With a declining market and plant closures, that could be more difficult than it sounds.
Gefco’s pricing with a struggling PSA could also come under fire. The OEM already attributed a decline in Gefco’s profit margin in its first half financial report to “renewed pricing clauses” in Gefco’s contract in 2012. The provider has historically enjoyed good rates from its owner, but it’s unclear as to whether PSA might put the hammer down under a new shareholder.