• Home
• Used vehicles
• Product news
• Dealer news
• Compliance
• Buying advice
• Archive

Another group on the transport take-over trail

James Millen, deputy editor of Accountancy, reports on an interview with the chairman of the expansion-minded Dundee, Perth and London Securities Ltd. Last year DPL bought Link Road Transport and Wilkinson Brothers, has just taken a 29.5 per cent interest in Maurice James Holdings, has been given the exclusive contract to run Dundee's new Freightliner terminal and is now bidding around Om for the 500-vehicle Nuttall group.

WHEN the Lim offer for Manchester-based William Nuttall Transport made recently by the fast-growing Slater Walker-based transport group Dundee, Perth and London Securities Ltd is turned down by the WNT board and shareholders — as seems most likely — a higher bid will almost certainly follow.

DPL's chairman, Michael Buckley, told me in an exclusive interview last week that he considers the price offered is "high"; but with such a potentially profitable prize at stake it would be surprising if, with confidence on the Stock Market rising, some predator had not the courage to raise the bid for the expansionist Nuttall group, which has more than 650 vehicles and a turnover in the region of £5m.

The Stock Market itself appears unimpressed with the present offer, the share price of William Nuttall tending to remain static at 47p, just 2p above DPL's bid. Dealing in WNT would soon be reflected in the price in view of the narrow market in these shares — there are less than 600 shareholders.

DPL's chairman likes the look of William Nuttall for several reasons, one of which is that in one fell swoop he can take over a sizeable group which has itself swallowed many smaller haulage companies in recent years.

Michael Buckley is convinced that his team can get an acceptable level of profitability out of WNT despite its poor recent performance and despite the reliance of the general haulier on a good economic climate and absence of industrial disputes. When I reminded him of the difficulties and dangers of the haulage industry, he retorted: "Every industry is difficult and dangerous. There is no industry that is not dangerous if you have bad management — and there is no industry in which you cannot make a profit if you have good management. Ultimately this is what it comes down to. This is a difficult industry to be in, I accept," said Mr Buckley, "but the fact is that it all depends on how good the deals are. In any industry you can do a good deal — and in any industry you can make money if you have good management.

"I'm not particularly interested in manufacturing, therefore when I bought my original shares in DPL I decided to develop a distribution company. We have developed it in a reasonably logical way — I say reasonably logical simply because so much of what one does early on when you have a small quoted company is dependent upon the deal rather than a grandiose plan. I was fortunate in doing a good deal with the first acquisition we made — also getting some very good management.

Top management "If you look it up in the records you will see that we bought a company• — Transport and Warehousing Ltd — for £470,000 worth of shares which last year made £160,000. I bought with it some top transport management. In general heavy haulage, I don't think there is a company in the country making a greater return on turnover. It is making about £170,000 a year on turnover of about £1m, ie 17 per cent. This is a very high return for general heavy haulage. Transport Development Group, for example, has a net profit on turnover return of about 14 per cent. Direct comparison, of course, is difficult because TDG has so many activities — they are in many different forms of transport. Certainly specialist forms of transport tend to have a higher return on turnover than general haulage."

Mr Buckley strongly criticizes transport companies for being overmuch concerned with building up their turnover •at the expense of profitability. "There have been numerous examples of companies increasing their turnover, but ending up earning less money.

"We are not interested in turnover, To us it is only important as a measurt of how much we may expand. But wc are fundamentally disinterested in turnover I think this is where we are differem from most people. The number of lorriei we run and the amount of sales w( make are not important. What is irlipor tant is the amount of profit we mak( — because in the long term it is on!) through profits that you can expand.

"Most public companies involved ix transport, with the exception of TDG seem to be very interested in turnover In my view TDG are the perfect exampl( of how to run a transport company. The have tended to buy companies and leavi them very much as they were — bu expecting a return on capital of 20 pei cent."

Management problems abound in trans port — labour relations, capital expendittm on vehicles, maintenance, depreciatiot treatment, rates, sub-contracting, returt loads, etc. Michael Buckley has answer: to most of them.

On rates he says: "This is a problem Um was accentuated by the abolition of A licences. But I am sure the position will ge better because I think that people are gettir4 more sensible about rates. Even on Euro pean transport now, the rates structure: are improving. Also, of course, all operator: are having trouble in getting renewal; of their operating licences. So far as th( RHA is concerned, they do of courst recommend rates, but who follows theni. It comes down to competition at the enc of the day.

On return loading, he says: "For companie in a very localized situation there must b value in being in a larger group — you cal always expect to have someone available take your own loads if you haven't tenni loads yourself."

Cheapest rate On sub-contracting, he says: "You can mak the mistake of insisting that you use you own companies for sub-contracting — which invites carrying things unprofitably Obviously if you are sub-contracting yot offer work to your own company first But if they can't carry it for you a: profitably for you as a carrier will, yot give it to whoever quotes the cheapes rate."

There is nothing complicated or un usual, so far as one can see, abou the corporate structure or managemen systems of DPL. "Our motivation is it small profit centres with the managemen interested in holding shares in the paren company. There is only one thing tha ultimately is going to make everybodl pleased and that is making more profit."

The aim for Dundee, Perth is tha it should become a widely spread distri bution company, the main part of whicl will be transport. It has two bonde( warehouses — one in Southampton one behind Liverpool Street Station — and sees bonded warehouses as an in teresting area for growth. "It is a good way of getting, a sensible return on property," says Mr Buckley. "We have approximately 200,000 sq ft of general warehousing attached to our transport depots and I think we have the largest ships stores in England."

"Both in location and in management expertise the Nuttall acquisition would be a very logical move for us — and for them, too," observes the DPL chairman. "They may disagree on price, but I think that even they would agree that there's a great deal of merit in putting the two companies together. There must be. But the deal may or may not go through — it's early days yet."

Mr Buckley agrees that it appears that the Stock Market is expecting another bid. "Normally speaking," he says, "that would be an interpretation that I would regard as correct. But I think it's not necessarily true in this case because there isn't any real market in the shares. The fact is that if there were a sensible market in the shares they would have been down to about 20p. This is because although it is a company which has net assets of 37p a share, a good part of this is in rolling stock which is regarded as a poor-class asset; and in the year ending March 31 1972 the company made a profit of only £20,627 after tax; it made a loss in the first half of the 1973 financial year — and isn't expected, I gather, to improve upon that loss in the six months ending March 311973.

"There are some very good high-class companies standing on price /earnings ratios of 9 and 10. Now if you put a notional PE of 10 on William Nuttall — and I don't think they merit it — and if, for convenience, you price WNT at 50p a share, resulting in a market capitalization of £1.2m, they must produce post-tax profits of £120,000 (£200,000 before tax) to justify that rating."

A large proportion of the WNT shares, according to Mr Buckley, are held by directors and employees of the company. He believes that if the shares were more widely held there wouldn't be much doubt that the bid would be successful.

"But I don't want to push the deal through with a lot of animosity, because I would want people in the company to work with us afterwards.

"The current situation is that a number of shareholders, who represent 27 per cent of the equity, have said that they will accept the offer," Mr Buckley told me. "These shareholders feel that their investment is likely to increase in value more in DPL with WNT than with WNT alone, so they have agreed to accept an offer from us. But I would very much like to get the WNT board as a whole to agree that the merger would make sense and recommend acceptance of the offer to their shareholders.

"The William Nuttall share price today is substantially below that at which it was first quoted on the Stock Exchange and obviously people want their shares to get back to that level as soon as possible." DPL's chairman is a 31-year-old chartered accountant who learnt the sweet science of takeover at the hands of an acknowledged master — financier Oliver Jesse]. He quotes Nuttall's appalling recent profit record when justifying the seemingly low offer price for a company with such a large turnover and fixed assets of nearly £14-m. It is true that net current assets (working capital) stood at a negative figure of more than £+m at March 31 1972; even so •the asset backing of the shares at 37p is very close to the offer price.

"The fact is," says Mr Buckley, "that when our profit figures for 1973 come out they will show that in the year to March 31 1973 we made £300,000 profit on a turnover of around £2m. William Nuttall, I believe, have a turnover of about £5m and are not making a profit.

"So I think it can be assumed that we have some sort of management in transport to get those sort of returns — and one would hope that this expertise put to work on WNT's turnover would substantially increase the return."

This case may well impress the institutional holders of WNT shares — thought to represent about 18 per cent of the equity — when they receive a copy of the formal offer document. But it is expected to be countered by Ham bras Bank, advising Nuttall, with assurances that the re-organized WNT board is well able to engineer a return to an acceptable level of profitability on its own account.

Certainly Jim Wild, until recently chairman of WNT and himself a chartered accountant, knows that efficient management and efficient control systems are essentials of success in the transport industry and has striven to make the group function effectively. He, like many others in industry, has faced the problem of trying to expand rapidly in a period of marked economic uncertainty.

Using the experience of 30 years in an accountancy practice, he went so far as to produce for the group in August 1969 a 13-page booklet called Accounting charges for the depreciation of haulage units. He also prepared a series of Tables of HP accruals which he employed because, as he pointed out to me, "it is so obvious that a larger proportion of the hire purchase charges is used up in the first month than in the last month of the term of a hire-purchase agreement".

Explaining these accounting treatments to me in a letter in November 197.1, he said of the interest tables: "I appreciate that most accountants take one-twelfth in the case of an agreement for a year or one-twenty-fourth in the case of an agreement for two years and so on, but as you will see from the tables, the true absorption is far more substantial in the first month than the last month".

Of the depreciation charges booklet, he commented: "I wrote the notes on the accounting charges for depreciation when the profits of the companies which originally formed this group were being adjusted for the purposes of the prospectus, and the only change which has since been made is that a 'Standard Quality' unit is now regarded as one of which the initial cost was up to 13500 (increased from £3000) which means that a 'High Quality' unit is one the initial cost of which is £3500 or more.

"This basis for calculating depreciation is proving very reliable in practice, particularly as we don't trade in vehicles which have been taken out of use. We sell them in the open market and still make a slight surplus on balance. The tendency is for the vehicles to be very slightly . under-valued in the balance sheet because we take the very heavy depreciation for the first two years and capitalize the true cost of the new equipment which we buy subject to a very substantial discount.

"You will appreciate that if we buy a unit the standard price of which is, say, £5500 and receive a trade discount of £1000, we must be valuing our equipment on a conservative basis. In fact, the valuation at March 31 1971 would have been £20,000 higher had we taken, depreciation, even on the cost price after deducting the trade discount, at 20 per cent using the straight line method."

Nearly a year later in his chairman's statement which accompanied the 1972 Report and Accounts — which showed group profit down from £108,758 to £27,157 on turnover which had risen from £2.4m to £3.1m — Mr Wild was still sanguine. He told shareholders: "I am confident that the future prospects of the group are good. I believe that road transport is a growth industry which offers real opportunity and the rewards of success to efficient management ..."

The real crux of William Nuttall's problem — low profitability — was explained by Jim Wild in these terms: "Whilst this reduction in profit from 9.8 per cent to 2.5 per cent of turnover after only 12 months was in the main due to influences already mentioned — the uneasy state of the national economy and a long period of industrial unrest, there was the factor that the substantial increase in turnover had to a major extent been due to increased outward traffic obtained and accepted by operating companies which had not been economically balanced by earnings from return traffic" (my italics).

"So, the planning of a national marketing organization was given urgent priority and it can be appreciated from the maps (showing the location of operating and service locations) that the group has now not only a reasonably balanced spread of operating branches providing a national road transport service, but that this is supported by a national marketing organization operating through traffic control offices well located to service industry nationwide and by so doing improve the economic application of group vehicles. Whilst the effect of the progress made by these two approaches to expansion will not be fully reflected in the results for the current year — the first traffic control office was opened on April 3 1972 and the national coverage will not be fully effective until January / February of next year — the turnover of the current year should be near to £6m."

Nuttall's turnover in 1970 was £1.6m. Despite having a chartered accountant chairman, various other qualified accountants at management level and a Bachelor of Engineering as group engineer (but, until recently, no other qualified accountant on the board), the massive growth in turnover that has taken place has produced a plunge in profits so marked that it would seem they no longer exist. Though, as I said, DPL believes it can reverse this situation.

Although about 17 per cent of the shares in DPL are held by Slater Walker (who also act as merchant bankers for the group) and the company is in a strong liquid position, it is not expected that there will be further bids for large public companies in the short term. "We haven't got the fire power," said the chairman. "It's all very well people pointing out that there are now quite a lot of companies on single-figure PEs: you try taking one over. They soon let you know that they expect an exit PE of 12 or 14. If you annualize our profits it works out that we ourselves are on a single figure PE, so we cannot expect to take over companies with exit PEs of 12 or 14. It would be diluting our company's earnings and would not be fair to shareholders."

Nevertheless, it would •be surprising if DPL stops buying non-quoted companies. Following recent acquisitions, and on the basis of estimated percentage contribution to pro forma 1972/73 profits of £900,000, the activities of the group are: Per cent Road haulage and warehousing 17 Fish transportation out of Hull 14 Commercial vehicle distribution 10 Wool growing in Falkland Islands 28 Shipstores, catering and bonded warehousing 17 Original activities 4 Finance and property 10 The fish transportation element arises from the purchase in February 1972 of the two separate competing businesses, Link Road Transport (Hull) Ltd and Wilkinson Brothers Fish Transport Ltd which were duly merged. The reaction of the Hull Fish Merchants' Association was to set up its own transport operation in competition to the merged group, but the attempt failed and as a result of this Link and Wilkinson has now entered a five-year agreement with the Association to transport the fish of all the members of the Association at agreed fixed tariffs which may be increased from time to time in the face of cost increases. The company also trucks fish for nonAssociation members including Macrae, Ross & Associated Fisheries.

General cargo A year ago the split of the business was 90 per cent fish and 10 per cent general cargo, but following rapid expansion on the general cargo side. the split (with roughly the same level of fish business) includes 30 per cent general cargo work. A further expansion of the general cargo business is expected though in the longer term the growth of the business depends to some extent upon the degree of expansion on Humberside.

DPL's accounts for the year to March 31 1973 will make interesting reading when they appear. At the half-way stage the group reported pre-tax figures of £303,000, compared with £181,000 for the same period the previous year.

What action will follow if the merger with William Nuttall takes place? "We have not got vast quantities of people sitting around doing nothing who could take on a company the size of Nuttall tomorrow," observes the DPL chairman. "The idea that our management would take over and that the WNT management would disappear is complete nonsense. It would be impossible for us to run the company. So it's a question of sitting down with them if the offer is successful and working out what is a practical management structure to best benefit our joint shareholders.

"But we have given no undertaking to anyone about the management situation."