Speedy’s (0SP:BU) Acquisitions in Bulgaria and Romania

In the previous post, I wrote about the leading delivery company in Bulgaria and hinted about its acquisition plans. Now – the promised follow-up.

 

Acquisition

This March, Speedy (0SP:BU) entered a preliminary agreement to acquire the businesses of Dynamic Parcel Distribution Romania and Geopost Bulgaria. The companies belong to the French Geopost and its Turkish subsidiary, respectively. Geopost in turn, is part of La Poste Group, a French state-owned post company, which operates in 40 European countries and is the second largest by revenue (€4.4b) in Europe (after Deutsche Post).

This is the second large deal in the package delivery industry in Bulgaria, recently. In 2012, the Austrian post, Oesterreische Post (POST:AV), acquired a minority, and then a majority, stake in the Bulgarian package delivery company MIBM, which is among the top 5 leaders in this space, together with Speedy, DHL, Econt, and InTime (UPS).

The acquisition will allow Speedy to work towards consolidating the Bulgarian and the Romanian markets and offering integrated delivery services to its clients in the two countries. On several occasions, management has pointed out the similarities between the two markets, which should make it easy for the company to apply its expertise gained at home to the Romanian market.

As a part of the deal, Geopost gets the option to purchase a 25% stake in Speedy now and a majority stake in 2020 at 8x EV/EBITDA at the time of each the purchase, as I understand it. At 8x EBITDA, the value of the equity is BGN 106m (24 per share). This is just slightly over the current market price of BGN 102m (23 per share). So, according to the deal parameters, Speedy is fairly valued at the moment.

 

Capital Raise

On March 31, Speedy announced a 20% capital raise, via a rights issue, to finance the deal. It will be effective in the coming months, once the Financial Supervisory Commission approves the prospectus and the Commission for Protection of Competition carries out its concentration study, which started on June 18 and takes around 2 months.

The company plans to offer 889,320 shares at 23. This accounts for BGN 20m of the BGN 32m needed for the acquisitions (actually, 26m for the acquisitions and 6mto be invested in the Romanian company). For the placement to go through, at least 80% of the planned amount, or 711,456 shares, should be subscribed.

The remaining financing will come in the form of a 7-year, BGN 13m bank loan at 3-month SOFIBOR + 3.4%.

 

Target Companies

Speedy is going to pay BGN 26m both companies. It doesn’t provide a split of how much it pays for each. Let’s take a look at the targets’ financial statements.

 

Dynamic Parcel Distribution Romania

As you can see in the financials above, the Romanian company is not in great shape:

  • expenses are very high
  • 2012 net margin was just 3.5%
  • 2 of last 5 years were losing, 2009 being particularly bad
  • following this, it sacked half its workforce
  • leverage is pretty high with debt nearly 3 times equity

I don’t have the full picture on the company as I found it difficult to dig out information in Romanian. Overall, I get the impression that the company struggled through the crisis and is still wobbly. This is in sharp contrast to Speedy, where revenues haven’t skipped a beat and while profit suffered somewhat in 2009, it never turned to loss.

If the Bulgarian and the Romanian markets for delivery services are so similar, management must account for the different fortunes of the two companies (and an unknown amount of luck). Speedy’s management has done a great job of running the company and it deserves the benefit of the doubt that it can fix DPD Romania and remodel it after Speedy. Needless to say, turnarounds are always tricky.

 

Geopost Bulgaria

The Bulgarian company looks much better than the Romanian target. Although it is one-fifth the size by revenues and one-fourth by assets, it uses these assets much more efficiently and with much less leverage to generate cash flows for its shareholders. Return on assets has averaged 30-40% and 50-60% on equity, which is similar to Speedy’s numbers. Geopost has been gushing cash with minimum reinvestment. It will make a good addition to Speedy.

 

Acquisition Price

As the target companies appear now, in their latest financials, it may seem that Speedy is overpaying. It is buying BGN 2m of operating earnings for BGN 26m. Assuming, 2m of operating earnings is somewhere around 3m of EBITDA, Speedy is paying close to 9 times, while at the same time management is willing to part with more than half of the company at 8 times EBITDA.

What this calculation doesn’t consider is the potential of the Romanian company. Geopost Bulgaria is already operating efficiently and I don’t think there is any room for improvement there, apart from some minor efficiencies from removing duplicate functions once it becomes a part of Speedy.

Dynamic Parcel Delivery, however, has a lot of room for improvement. If management succeeds in bringing EBITDA margins to the average 19% for Speedy, on revenues of BGN 21m we are talking about BGN 4m EBITDA. At a multiple of 8, this brings the equity value of the Romanian company in the vicinity of the total purchase price of BGN 26m and the Bulgarian company comes free.

 

Valuation

The essence of this acquisition comes down to the ability of Speedy’s management to refashion the Romanian business after its Bulgarian business. If successful, this acquisition will help Speedy top management’s forecast of doubling by 2020.

But for now, let’s assume management’s forecast of 12% annual growth through 2020 turns out correct, EBITDA should be around BGN 30m. At 8x EBITDA, Speedy’s enterprise value in 2020 is BGN 240m. If leases grow at the same rate as revenues and the UniCredit loan for the acquisition is mostly paid off by 2020, the value of the equity stake should be around BGN 220m. This is roughly double today’s price and it is the expected outcome since the underlying assumption in all these calculations is a doubling of revenues by 2020 and steady margins. We have yet to account for the possible cost reductions coming from the switch to sub-contractors and the potential to improve efficiency at the newly acquired companies.

In the worst case scenario, the expansion in Romania is a failure and BGN 32m is wasted. Whatever is collected from disposing the business there goes towards covering liabilities and legal fees. Speedy grows at the rate of the overall economy – 3-4% – and pays no dividend. At 8 times EBITDA, the company will be worth BGN 120-130m in 2020. In this case, you locked in your money for 6 years and it cost you whatever your next best alternative investment over the period was.

To sum it up, under the base case, an investment in Speedy compounds at 12% and pays out around 4-6% in dividends. Under the worst case, your investment goes nowhere over your holding period. Of course, the words “worst case” should always be taken with a grain of salt. These cases always reflect the viewpoint of the one stating them, not yours. If your worst case is that Speedy is nationalized and you lose everything, then obviously you shouldn’t find yourself anywhere near such deals.

In any case, Speedy is an interesting opportunity – a leading business with considerable growth potential, priced fairly. On the flipside, it operates in Bulgaria and is relying on entering Romania successfully.

For me, it is one of the best companies listed in Sofia and a good value for money. So, I will be opening a position tomorrow.

 

Current Events

The past week, while I was working on this post, Bulgaria experienced a minor banking crisis. First, Corporate Commercial Bank was taken over by the central bank after rumors about its insolvency caused a panic in its depositors and started a good, old-fashioned bank run. There are thick political undertones to the bank’s problems.

Following these developments, a second bout of rumors, including anonymous, panicky, messages to people’s mobile phones, placed First Investment Bank under strain on Friday as BGN 800m were withdrawn.This sum represents roughly 10% of deposits and is equal to the bank’s Tier 1 capital, making it likely that the central bank will take control of it this week or will inject capital in First Investment Bank and probably establish system-wide facilities to for all banks that find themselves in a capital squeeze.

I write this more as general information for those reading this write-up. It is not likely that these events will have any effect on Speedy’s stock price, much less on its business. As noted in the previous post, Speedy is 94% owned by its founder CEO. Nevertheless, in the last trading session for the week, the price dropped from BGN 23 to 22. More foolishness could additionally sweeten the deal.