Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

CH Robinson Worldwide Inc. (NASDAQ:CHRW) announced on Tuesday that it will acquire Phoenix International in a deal valuing the company at $635 million. Investors seemed to favor the deal, with shares of CH Robinson ending the day with gains of 0.8% in a market that was down. Earlier in the day's session, the company's share price gained as much as 4%.

The Deal

CH Robinson Worldwide announced that it will acquire Phoenix International, a global forwarding service provider. The privately held Chicago-based company provides ocean, air and customs services across the world. Its 2,000 employees serve over 15,000 customers across the globe on a daily basis.

CH Robinson will pay $571.5 million in cash and the remainder of $63.5 million in its own stock. Existing cash balances and a new credit facility make sure the financing of the deal is in place.

CEO and Chairman John Wiehoff commented on the acquisition:

"Phoenix is a high quality growth company that brings additional expertise and scale to a key part of our long term growth strategy. Along with their proven track record of success, Phoenix has strong customer and carrier relationships, a talented management team and excellent people, and a performance-based company culture that is very similar to Robinson's."

Phoenix International generated annual gross revenues of $807 million over its latest fiscal year ending June 30. Net revenues came in at $161 million. Over the past five years, operating income grew at an annualized rate exceeding 20%, coming in at $48 million.

The deal values Phoenix at roughly 0.8 times gross revenues and 4.0 times net revenues. CH Robinson pays 13 times annual operating earnings. The acquisition of Phoenix is expected to be modestly accretive to earnings in the first year.

CH Robinson expects to close the deal in the fourth quarter of 2012. The deal is subject to regulatory approval and the usual closing conditions.

Valuation

CH Robinson ended its second quarter of 2012 with $241 million in cash and equivalents. The company operates without any significant amount of debt, for a comfortable net cash position.

For the first six months of 2012, CH Robinson generated revenues of $5.5 billion. The company net earned $221.1 million, or $1.36 per diluted share. For the full year of 2012, the company is on track to generate revenues just north of $11.0 billion. Full year net income could come in around $450 million, or $2.75 per share.

Valued at $9.5 billion, the market values the firm at roughly 0.9 times annual revenues and 21 times annual earnings. This excludes the impact of the acquisition of Phoenix International.

Currently, CH Robinson pays a quarterly dividend of $0.33, for an annual dividend yield of 2.2%.

Investment Thesis

Year to date, shares of CH Robinson Worldwide have fallen some 15%. Shares gradually fell from $70 in January to lower fifties in the summer. Yesterday, shares bounced back to close at $59 per share. Investors have been concerned about the impact of higher oil prices, and a global economic slowdown that has impacted competitors such as FedEx (NYSE:FDX) as well.

Over the past five years, shares have risen a mere 10%. Shares traded in a wide trading range, hitting lows of $40 in 2009, and touching upon $80 in 2011. Between 2008 and 2012 the company grew its annual revenues from $8.6 billion to an expected $11 billion in 2012. Again, this excludes the contribution from Phoenix. Earnings grew from $359 million to an expected $450 million this year. Earnings per share grew a little faster ,as the company retired 5% of its shares outstanding during the time period.

The acquisition of Phoenix adds some more diversification to the company's business model. Phoenix is strong in ocean shipping, while CH Robinson traditionally focuses on trucking brokerage. Furthermore, the price seems fair. Costs and cross-selling synergies are to be achieved as well, although not specified.

Shareholders can be relieved. Phoenix adds diversification and growth to the company at a fair price. Limited earnings accretion is already expected in the first year. Furthermore, the financial position of the company remains very strong.

The acquisition looks attractive on both a financial and strategic basis. Yet the overall appeal of CH Robinson's shares remains troubling for me in a slowing economy that puts pressure on margins. While I applaud the deal, I remain on the sidelines as the valuation multiples are too high in general for me.

Source: CH Robinson Worldwide: Acquisition Of Phoenix International Is A Nice Bolt-On Addition