JOHN Menzies is to split into two separate entities by late June, when its distribution arm is expected to complete a reverse takeover of Datchet-based DX Group.
The move, which will see DX pay £60 million for the John Menzies business, signals a strategic about-turn for Edinburgh-based John Menzies, which has until now been opposed to separating its aviation and distribution functions.
After bulking up its aviation business with the $202 million acquisition of Florida-based ASIG in February, however, the firm plans to split in two, with the aviation arm keeping John Menzies’ main market listing while the delivery arm will reverse into alternative investment market-listed DX.
Group company secretary and corporate affairs director John Geddes said: “Four or five years ago we used to say there was no rationale for the businesses not being together but a couple of things have happened.
“The aviation business is much bigger now and more mature and doesn’t need the cashflows of distribution – it can stand on its own two feet.
“There have also been changes in the dynamics of the logistics market, with the rise of internet shopping making it a massive growth opportunity.”
John Menzies’ delivery business, which was set up to distribute newspapers from printers to newsagents, has suffered from the decline in print journalism, with Mr Geddes saying that “every January we know we have to find £5m of cost savings just to stand still”.
The DX deal will allow the business, which mainly makes deliveries during the night, to enter the day-time market, something Mr Geddes said will be served well by John Menzies’ wide distribution network.
“If you look at where we are as a distribution business, which is still largely an overnight operation, we have a lot of branches and vehicles that are not utilised during the day,” he said.
“Because we do papers, we’ve got a unique network in the rural locations where parcel companies hate going – that means anywhere north of Perth – but they could deliver to one central point and we could be their subcontractor.
“This opportunity with DX arose and it step-changes our business overnight. It brings us into growth markets we are not exposed to.”
He added that as DX operates in the day and John Menzies at night it is unlikely that any drivers will lose their jobs due to the deal.
According to the terms of the transaction, all John Menzies shareholders will receive shares in the new distribution business, which is yet to be named and which Mr Geddes said should be valued at around £300m. The current John Menzies business has a market capitalisation of £526m.
“John Menzies at the moment trades at a blend of aviation and distribution multiples,” Mr Geddes said.
“We have EBITDA [earnings before interest, tax, depreciation and amortisation] of £30m, DX’s is £10m and we are estimating synergies of £8-12m.
“Connect Group [the distribution business formerly known as WHSmith News] trades on multiples of six to six and a half times.
“Even with a discount to that we should have a market cap of around £300m.”
The market reacted positively to the news of the deal, with John Menzies’s shares, which started the day trading at 662.5p yesterday, closing three per cent up at 678p.
As the deal is being structured as a reverse takeover of DX its shares were suspended from trading after the deal was announced.
While the transaction is slated to complete in late June, Mr Geddes said that John Menzies will only go ahead with the deal “if it works for us and our shareholders”. He added that activist investor Gatemore Capital Management, which currently owns 11 per cent of DX, will also “need to be happy”.
Gatemore, which last week called for a DX extraordinary general meeting in a bid to have its chairman Bob Holt and non-executive director Paul Murray replaced, slated the proposals, claiming they offered poor value for DX’s shareholders.
Its managing partner Liad Meidar said: “On the surface, the proposed combination of DX Group and John Menzies’ distribution division looks like a bad deal for DX shareholders and a face-saving exercise for the DX board.”
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