CJ Korea Express (CJ Korex), South Korea’s largest logistics company, has acquired China’s privately owned Rokin Logistics in a deal that could potentially double its revenues on the mainland.
Analysts say the transaction’s $565 million enterprise value makes for an expensive price tag in comparison to other M&A deals from the Asian logistics sector.
Nevertheless, they still believe it makes a lot of sense for the Kospi 200-company given its ongoing strategy of diversifying away from South Korea's saturated logistics sector and into China, where booming online shopping is transforming the business of delivering goods.
Rokin’s largest shareholders have sold a 71.4% stake in the cold food chain and petrochemicals logistics operator for $378 million.
The vendors comprise two private equity firms and a number of the founding shareholders. The former includes Hong Kong-based Capital Today, founded by former Baring private equity executive Kathy Xu, and Geneva-based Pamoja Capital.
The remaining 28.6% will be retained by the founding shareholders, who will continue to run the company, which numbers McDonald's and Haagen-Dazs among its largest customers.
The acquirer is CJKX Rokin Holdings, a special purpose company in which CJ Korex owns 68%.
Korea’s state-owned National Pension Service and Seoul-based private equity group STIC Investments own the remaining 32% stake. CJ Korex has said it will fund its $257 million portion with debt, although analysts say this will only increase net gearing from 56% to 70%.
Hefty premium
The deal, which closed over the weekend, values Rokin on a trailing 12 months EV/Ebitda multiple of 21.7 times based on Ebitda of $26 million. This represents a 44.6% premium to the average EV/Ebitda multiple of 15 times for Asian logistics deals over the past decade.
In February, for example, Singapore’s APL Logistics was sold to Japan’s Kintetsu World Express (KWE) in a $1.2 billion deal that also valued the company at 15 times.
CJ Korea missed out on APL Logistics and was determined to snag Rokin when its owners decided to put it up for sale. A source close to the transaction say it consequently ended up in an intense bidding war with about 10 other interested parties.
The source added that CJ Korex outbid two strategic Chinese suitors, which already have a presence in the logistics sector.
However, as Daiwa analysts wrote in a research report: “Despite the high price, we believe the deal should help CJ Korex in light of the significant growth opportunities in Rokin’s mainstay frozen food and hazardous chemicals transportation business.”
KDB Daewoo Securities analysts say the country’s frozen logistics business has a very positive outlook because of the high spoilage losses for perishable goods (20%-39% compared to 5% in developed countries).
“Rokin’s revenue has increased at a CAGR of 20% in the past few years,” the Korea firm wrote in a research note. “We expect the deal to more than double China revenues, pushing up annual revenue for CJ Korex’s Chinese entities to around Won700 billion ($580 million).”
It estimates that Rokin could boost CJ Korex’s operating and net profit by 13% and 16% if the former’s full-year earnings are incorporated in the latter’s 2016 financials.
On Monday, CJ Korex share price closed down 2.79%, after rising 1.01% on Friday when a regulatory filing revealed the company was “in the final stage” of negotiations to take over Rokin. Year-to-date it is down 10.97%, underperforming the Kospi 200, which is down 6.77% over the same period.
In a recent interview, CJ Korex CEO Yang Seung Suk told the Korean media his company aims to increase its sales from an estimated Won5 trillion ($4.2 billion) in 2015 to Won25 trillion ($21 billion) by 2020.
He forecast that roughly 70% of the company’s sales will be generated from overseas markets as CJ Korex seeks to acquire up to three foreign competitors each year.
According to data provider Dealogic, the Rokin deal represents CJ Korex’s second acquisition in China following the purchase of a 51% stake in Qingdao Smart Cargo International Services, another Chinese logistic firm, in 2013.
Established in 1985, Rokin has 48 branches and 1,500 trucks, covering a network of roughly 1,500 cities and towns across China, according to the company’s website.
Deutsche Bank is advising Rokin, while Citi is advising CJ Korex.
