Transport Perspectives 2012

JUNE/JULY 2012
KPMG International

Transport Perspectives

This edition contains two articles on topics which could Contents
change the landscape of European transport.
The Fourth Railway Package -
Gerard Whelan looks at the development of the EU’s Fourth A Game Changer?
Railway Package, which has the potential to change completely Page 2
the competitive landscape of European rail.
M&A Outlook - Transport and
Steffen Wagner and James Stamp examine the trends in the M&A Logistics 2012
market in global transport and logistics during 2011. They look Page 5
at the significant increase in transactions in Q1 2012 and make
predictions for the outlook for M&A in the remainder of the year.

TRANSPORT PERSPECTIVES / June/July 2012

© 2012 KPMG LLP a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member
,
firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

2 | Transport Perspectives / June/July 2012

The Fourth Railway Package -
A Game Changer?
Gerard Whelan, Director – Regulation and Economics

The Fourth Railway Package, currently under consultation by the European Union, has the potential
to transform European passenger rail with the introduction of new legislation aimed at opening up
domestic passenger rail markets to competition.

Introduction others have made only minor changes. There have been successes and failures
This article considers the options Despite a sustained effort on market with both franchising and open access
available to the EU, examining how liberalisation by the EU, the majority of operations in European passenger
rail markets should be structured and European rail operations remain state and freight markets. The successes
regulated to maximise efficiency, controlled. There is a lack of consensus have generally led to the development
service quality, and value for money. on the best way to encourage and of innovative services at lower cost.
The result of the EU’s deliberations regulate competition. The failures have often resulted in the
on liberalisation will transform the rail withdrawal of loss making operations.
In a bid to remedy this, and create a
market for owning groups, governments single European railway area, the EU Competitive tendering has been
and regulators. For many, this legislation is committed to the introduction of a the preferred method to encourage
will drive significant changes, the fourth package of railway legislation. competition in passenger markets. Open
outcomes of which are uncertain. The package will ‘recast’ the access has been the preferred method
Background requirements of existing legislation on to encourage competition in freight
Over the last 20 years, the EU has track access to make it less ambiguous. markets. There have also been open
introduced three packages of legislation More importantly for rail owning groups, access operations in passenger markets,
aimed at opening up domestic and it will introduce new legislation aimed including those operating alongside
international rail passenger and freight at opening up domestic passenger non-exclusive franchised services.
markets to competition. The legislation markets to competition. The Fourth
Commercial interest in open access
has included requirements for member Railway Package is currently under
appears to be growing:
states to: consultation and is expected to be
published at the end of 2012 or the • Regiojet introduced open access
• Un-bundle the management of beginning of 2013. services on the Prague-Ostrava
infrastructure from passenger and Haví㶣ov route in September 2011.
freight operations. The method of competition –
Open Access vs.Tendering • WESTBahn introduced open access
• Establish non-discriminatory Competition is regarded by many as services between Vienna and
infrastructure access charges and the best way to deliver better services Salzburg in December 2011.
capacity allocation rules.
to customers. It provides incentives • Deutsche Bahn introduced services
• Establish an independent body to to invest to improve efficiency and between Frankfurt and Marsellies
regulate competition. service quality. However, creating an (with SNCF) in March 2012 and is
environment to stimulate competition planning to offer services between
• Establish open access rights for
within rail markets is not easy. It London and Frankfurt and London and
international rail passenger services
between member states. requires a degree of separation in Amsterdam.
the management of infrastructure
In the July 2011 edition of ‘Transport and operations and the creation of • NTV started high speed services
Perspectives’ we noted that between nine Italian cities in April 2012.
non-discriminatory infrastructure
implementation of the legislation has, access rights. Once these rights The EU has traditionally favoured
in reality, varied from state to state, with are established, competition can open access competition on profitable
each government adopting a different be encouraged via franchising (i.e. long distance routes and competitive
approach. Some countries have made competition for the market), open tendering for unprofitable but socially
quite radical changes to the ownership access (i.e. competition in the market) necessary regional and urban services.
and regulation of their railways whilst or a combination of the two. However, the existence of economies

,

Transport Perspectives / June/July 2012 | 3

of scale and the fact that most markets At the same time, the arrangements This would involve continued efforts
require a degree of public funding mean must avoid the danger of concentrating to address the remaining structural
that the scope for on-track competition capacity within either the regulator or and strategic barriers that exist to the
is limited. Greater progress with market the Ministry of Transport. This would risk establishment of a well-functioning
liberalisation may therefore arise leaving the other without the necessary Single European Passenger Railway
from policies focused on competitive skills to function effectively. Area, including:
tendering. Indeed, this may also prove
The tendency to micro-manage markets • Technical interoperability barriers
advantageous from a cost perspective.
should also be avoided. Regulation such as different track gauge widths,
Allowing co-operation between the electricity systems and voltages,
should promote competition rather
infrastructure manager and the railway signalling systems, platform
than try to manage it. It should provide
undertaking as part of a longer franchise dimensions and operational rules.
the right commercial incentives at the
agreement may help reduce costs and
outset and invoke measures to correct • Absence of an effective rolling stock
align incentives to invest.
anticompetitive practice or abuse of leasing market, cross acceptance
The Regulator’s Role dominance if required. It may therefore procedures for rolling stock and
Given the push to open up rail markets to be preferable to shift the focus of access to depots.
competition, what sort of regulation will regulation from defining market prices
be required to make those markets work? • Fragmentation of tendered contracts
and quantities in advance, to allowing
and variability in approach across
markets to work and intervening only
A key enabling factor for market regional tendering authorities.
when necessary.
liberalisation will be the establishment
In addition, the last four years has seen
of an independent regulator with a The principle of subsidiarity1 makes it
significant consolidation in the European
clearly defined set of responsibilities. unlikely that there will be a common
passenger rail market, including:
The regulator must be independent approach to rail regulation across
from the government, the infrastructure EU member states. However, the • Deutsche Bahn’s acquisition of Arriva.
manager and railway undertakings. establishment of an Independent
• The merger of Veolia and Transdev.
Regulators’ Group (IRG – Rail) will help
Regulation is by its nature a political
harmonise a consistent application • NS’ acquisition of Abellio.
process and there are strong political
of the regulatory framework. The • SNCF’s increasing its share in Keolis
pressures for direct government
Group aims to facilitate the creation to 70%.
intervention in rail markets. However,
of ‘a single, competitive, efficient and
for competition to evolve, the regulator Monitoring will be required to ensure
sustainable internal railways market’.
should be free to act independently that the continued trend towards
It currently comprises regulatory bodies
to provide a stable and predictable consolidation does not result in
from 17 countries.
environment for businesses to pursue increased levels of market power and
their long-term commercial interests. Encouraging Competition anti-competitive behaviour.
With the regulatory framework for
The regulator’s primary focus should
market liberalisation in place, the EU,
be to ensure that the infrastructure
national Governments and tendering
manager allocates track capacity in a
authorities will all also have a key role
fair and efficient way. Other regulatory
to play in ensuring that competition is
responsibilities, such as those
delivered in the most effective way and
surrounding fares and service quality,
that a level playing field for competition
should be assigned to those who have
is established.
the required capacity to manage them.

1 The principle of devolving decisions to the lowest practical level

,


Real Competition be allowed to act independently from Private rail owning groups should
Where competition has been government, and the operators must be continue to maintain a keen insight
successfully promoted, it has largely given sufﬁcient freedom to incentivise on market developments in the
been via competitive tendering, them to be competitive and deliver high EU to position themselves for the
although there have been some open quality service. opportunities it will bring. State owned
access services in Britain, Germany, railways must ensure that they are
Finally, we must note that an absence
Austria, Sweden and Italy. adequately prepared for possibly the
of competition does not necessarily lead
most radical change in their history.
This is the model that is most to declining standards on railways in
appropriate for allowing effective Europe. Many rail passenger and freight
competition, whilst ensuring the social markets experience strong cross-
obligations of the railway can be met. modal competition. This will continue to
incentivise rail operators to provide
Regulation should be at a level that is
a quality service at low cost, regardless
high enough to ensure safety, value for
of the speciﬁc arrangements in the
money for the taxpayer, and a minimum
rail market.
level of service provision. However, for
the market to evolve and for competition
to be free and fair, the regulator must

,


M&A Outlook – Transport and

Logistics 2012
Steffen Wagner – Partner, European Head of Transport M&A
James Stamp – Partner, M&A

Transport transactions in 2012: This report looks at the transactions exception, and that the recovery from
Stepping up a gear landscape in transport and logistics in the 2009 post-recession low point
Transport and Logistics (‘T&L M&A
’) 2011. It examines the driving forces appears stable.
activity hit a four-quarter high in the first behind these trends, which can be
Indeed, the first half of 2011 recorded an
three months of 2012, with the characterised as follows:
increase in the total value of
underlying drivers of transactions
• Average transaction values lower than transactions on the second half of 2010.
aligning to fuel US $27 billion of
.9
2010 (particularly in North America) The second half decrease reflects the
completed and announced transactions.
reflecting the distorting impact of the increased uncertainty and reluctance of
The emerging trends suggest that 2012 US $36.7 billion Burlington Northern investors in the wake of the debt crisis
is poised to be a year for accelerating Santa Fe deal in prior year, and the in the European Union.
global M&A activity in the transport and impact of “distressed M&A”
In value terms, 2011 average transaction
logistics sector. We think that activity particularly in H211.
size was lower than 2010. Although
will be driven by four factors:
• Strong growth in EMEA fuelled by a there were large strategic transactions
• Significant war-chests built up during number of landmark transaction in the first half of 2011, more small
the economic crisis are now ready for including the divestment of TNT transactions and bailouts (“distressed
deployment. Express for US $7 billion.
.2 M&A”) were observed in the second
half of the year, depressing average
• Strategic and financial investors • EBITDA and Sales multiples
values for the year.
looking to capitalise on emerging increasing for the third consecutive
trends in high growth niche markets year, as EMEA multiples converge. Despite the drop in total transaction
including e-commerce, time and values compared to 2010, the mergers
Transactions Market in 2011 –
temperature sensitive delivery, and and acquisitions market for transport
Reduced speed in the second half
secure courier requirements. and logistics remains buoyant. In 2011
As graph 1 shows the number of
M&A transactions totaled US $52.1bn:
• A need for scale and consolidation in transactions in 2011 remained at a
twice the equivalent figure in 2009.
traditional T&L segments including post, similar level to the previous year. This
passenger transport and shipping. demonstrates that 2010 was not an
• Continued appetite from
infrastructure investors for quality
airport, port, and road assets.
Graph 1 – Transactions in transport and logistics
M&A activity has traditionally been a 60 600
barometer of confidence, and on this 544 552
525
basis the prognosis is good. 2011 and 484 496
50 449 500
2010 transaction levels (measured by 439
value and number) exhibited a return to 417
Transaction value (US $bn)

Number of transactions

normality over crisis-hit 2009. Although 40 400

M&A levels in the second half of 2011
were impacted by sovereign-risk related 30 300
financing uncertainty, the new-year has 48
hit a higher gear. 20 200
32 31 31 34
Although short-term factors such as
further fuel-price shocks and debt 10 18 100
market jitters may influence the timing 12 14

of activity, we think that the imperatives 0 0
H1 H2 H1 H2 H1 H2 H1 H2
for change are aligned to drive activity in 2008 2008 2009 2009 2010 2010 2011 2011
the medium term.
Transaction value (US $bn) Number of transactions

Source: Thomson Financial Database

,


Europe leads the way These include: On closer observation, however, there
The drop in total transaction value in the are large differences between the
• The divestment of the TNT Express
transport and logistics sector in 2011 individual regions. In EMEA, for
branch for US $7.2bn.
was most pronounced in the regions of example, the valuation levels are
Asia-Pacific (ASPAC) and North America, • The investment of French sovereign particularly high. A trend toward
as shown in Graph 2 (right). wealth fund, Caisse des Depots & increasing valuation levels can also be
Consignations of 26.3 percent in La seen in North America and ASPAC,
In North America the number of
Poste SA, with a value of US $2.1bn. albeit somewhat less dramatic than
transactions was stable, however the
Europe. Despite an increase in total deal
total transaction value declined to US • The sale of 38 percent in equity of the
value in Latin America, the valuation
$4.7bn from US $45bn in 2010. 2010 Brussels airport to Ontario Teachers
levels are decreasing.
was exceptional in North America, due Pension Plan for US $1.7bn.
to the purchase of Burlington Northern In North America and EMEA it can be
Strong valuation levels suggest
Santa Fe by Berkshire Hathaway with a seen that in 2011, the EBITDA and EBIT
positive outlook
transaction value of US $36.7bn. In multipliers have converged so that they
Valuation multiples of transactions (the
ASPAC there was also a (less dramatic) are now almost identical to each other.
ratio of enterprise value to sales, and
decrease in transaction value. In Latin This shows that in 2011, a number of the
EBITDA) during the last three years have
America the transaction value grew key transactions in these regions related
increased.
significantly, albeit from a low base. to asset-light companies.
Valuation levels are now almost at the
However the major story is the increase
levels prior to the outbreak of the financial
in transaction value in the Europe,
crisis in 2008. This demonstrates the
Middle East and Africa (EMEA) market.
increased confidence of investors in the
Transaction values in 2011 were US
transport and logistics sector, and the
$30.1bn in comparison to US $12.7bn in
renewed appetite for mergers and
2010. The number of transactions in
acquisitions. Graph three (right)
EMEA was very similar to 2010,
demonstrates this.
indicating a number of landmark
transactions in 2011.

Graph 2 – Transactions by region Graph 3 – Valuation multipliers for transport and logistics M&A
14.0
100 1,200
1,056 1,067
90 989
999 12.0
964 1,000
80
855
10.0
70 784

800

60
8.0
Multiple (x)

50 600

6.0 12.2
40 10.9 11.3
400
30
9.0 9.3
4.0
7.9
20
200
2.0
10

0.8 1.2 1.3
0 0 0
2005 2006 2007 2008 2009 2010 2011 2009 2010 2011

North America Latin America EMEA ASPAC EV/Sales EV/EBITDA EV/EBIT


Source: Thomson Financial Database Source: Thomson Financial Database

,


The new transport investors Outlook 2012: On the runway? financing will be a key factor in the
The final key conclusion from 2011 is The first quarter of 2012 showed outlook for 2012.
that Private Equity businesses are growing M&A activities in the transport
M&A Appetite of strategic investors:
showing renewed appetite for the sector compared to the second half of
The M&A appetite of transport and
transport and logistics sector. 2011. This can be clearly demonstrated
logistics firms is often correlated with
in graph 5 (right).
Historically the market was unattractive their debt capacities. This is higher than
to financial investors, due to Overall, 177 transactions with a total in previous years. In particular,
comparatively low growth and small value of US $8.2bn have been companies in the Logistics and Express
margins. However, from 2006 financial completed. A further 147 mergers and segments currently have deep pockets
investors started to show strong acquisitions with a total value of almost and stand ready for more strategic
appetite for the sector. Private Equity US $ 20bn have been announced in the acquisitions.
has been interested niche markets with first quarter of 2012 representing a
This has been recently evidenced by
high margins and growth opportunities, significant increase on 2011.
UPS’ acquisition of TNT Express.
and high entry barriers. Companies in
Again, Europe has been the centre of
those niche markets are typically The key sectors to watch over the
M&A activity, with the largest number
logistics companies active in the coming year are shipping and logistics.
of transactions completed in Q1.
transport of time-sensitive and In the global shipping market, the
temperature controlled products. To make this strong start to FY12 outlook for the next year is bleak, with
sustainable, three key factors must overcapacity expected to remain.
These include food, medicines,
be met.
chemical products or hazardous freight. As a result, there is likely to be further
Confidence in sustainable economic
need for consolidation through
Against the general trend total recovery: This depends mainly on
distressed M&A, though the transaction
transaction value traded by financial continued market trust in the solutions
sizes will be reasonably small.
investors actually grew in 2011 to the European debt crisis. Should the
compared to 2010, though still remains economic outlook remain stable, The logistics market, particularly in
low compared to 2006-2008. business activity could improve as early Europe, remains fragmented. Private
Transaction value by investor type is as the second half of 2012. equity investors looking to invest in
shown in graph 4 (right). niche markets, and the ongoing need for
Investment pressure on financial
consolidation, are likely to drive M&A
investors: The pressure on financial
activity in this sector.
investors to deliver strong returns is
high, following a disappointing year in Should the trend established in Quarter
2011. However, many Private Equity 1 continue, 2012 could be an exciting
firms are finding it difficult to attract year for transport and logistics.
financing, and the ability to attract new

Graph 4 – Transaction value by investor type Graph 5 – Quarterly deal values in transport
100

90
30
80

25
70

3
60
20
20
50

15 3
40 3

30
10 20
5
20
14 12
5
10 8
7

0 0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012
Financial investors Strategic investors Completed transactions Announced but not yet completed or withdrawn

Source: Thomson Financial Database Source: Thomson Financial Database

,

Contact us

Dr Ashley Steel
Global Chair - Transport and Logistics
T: +44 (0)20 7311 6633
E: ashley.steel@kpmg.co.uk

Daniel Lawrence
Global Executive - Transport and Logistics
T: +44 (0)20 7694 8348
E: daniel.lawrence@kpmg.co.uk

Dr Gerard Whelan
Director - Regulation and Economics,
KPMG in the UK
T: +44 (0)20 7694 1595
E: gerard.whelan@kpmg.co.uk

Dr Steffen Wagner
Partner, European Head of Transport M&A,
KPMG in Germany
T: +49 69 9587 4102
E: steffenwagner@kpmg.com

James Stamp
Partner, M&A,
KPMG in the UK
T: +44 (0)20 73114418
E: james.stamp@kpmg.co.uk

The information contained herein is of a general nature and is not intended to address the circumstances of any particular
individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such
information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such
information without appropriate professional advice after a thorough examination of the particular situation.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of
independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has
any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International
have any such authority to obligate or bind any member firm. All rights reserved. Printed in the United Kingdom.
The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
www.kpmg.com RR Donnelley | RRD-270377 | June 2012 | Printed on recycled material.

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