Many deals are flashy, many are unique, many are fraught with interesting personalities or circumstances. But some deals are just plain good.
That was the case with Questor Management Company’s turnaround of freight forwarder GeoLogistics Corp. Questor took a company on the verge of bankruptcy in 2001 with $22.1 million EBITDA losses, and made it into a company with more than $40 million in projected EBITDA when it exited in 2005. Questor Director Kevin Prokop called the deal, “the poster child for what we do.”
Oaktree Capital Management and William E. Simon & Sons formed GeoLogistics, a freight forwarder, in 1996. Those two firms saw an opportunity in the space and rapidly consolidated through acquisitions. Operating in an industry with an estimated $92 billion in global annual sales, freight forwarders are the go-between for manufacturers and shippers. The forwarder buys space on a plane or ocean liner, then resells that space to the manufacturer who is shipping products, typically of 70 lbs. or more. GeoLogistics has a footprint in 26 countries with a customer base that includes General Electric, IBM, Wal-Mart, Cemex, Royal Caribbean and Levi Strauss.
But in 2000 and 2001 the industry took a bad turn, with a fall off in global GDP and the impact of 9/11. GeoLogistics suffered under a heavy debt load of about $90 million with bankruptcy on the horizon. Before it approached Questor, Santa Ana, Calif.-based GeoLogistics had tried a soft sale process and been approached by strategics, but they were scared off by the red ink and the negative trends, said Prokop.
Questor liked what it saw: GeoLogistics had long-term growth potential, it was well-positioned geographically, with a strong position in Europe and a profitable position in Asia, and although the company had problems, most of them were fixable because they were in the U.S., not overseas. Questor thought the company was worth buying, given the industry’s growth rate of between 8% and 10% annually.
GeoLogistics had received a higher offer about a year before the Questor negotiations began, when the company was performing better, so negotiations on price were fierce. Questor used a preferred stock security in the transaction, to keep both sides happy. The preferred shares would allow old equity to participate only after Questor hit its targeted rate of return, but it was junior only to the existing bank debt. “We were able to bridge a significant valuation gap because of the structure,” said Questor managing director Robert Denious.
The Turnaround Begins
Questor knew the next chapter for GeoLogistics had to be turnaround-focused rather than growth-focused. That led to changing four of the five top executives. “You need a management team of a different DNA to execute a turnaround,” said Prokop. Only the head of operations in Asia would remain, the rest would be replaced and report to new Chairman William Flynn, who Questor had met during due diligence.
Questor recognized if it moved the operations to breakeven in the U.S. it would have a business that was EBITDA positive. In the states, then, Questor closed branches, reduced overhead and exited warehouse contracts that weren’t performing.
Questor also scrutinized one branch closely, then spread the lessons it learned there worldwide. “We literally did stop watch studies,” said Denious. One glitch Questor discovered was that import and export staff weren’t being used effectively. As businesses approached deadlines at the end of each week, they would export packages. Those packages, shipped at the end of the week, would arrive in the beginning of the next week, which meant the import and export staff were busy at different times of the week, leaving one group with nothing to do while the other was busy. Questor cross-trained staff in both imports and exports.
By 2004, Questor had shifted its focus to growth. By then, GeoLogistics had “earned the right to grow,” said Prokop. “We use that phrase, earn the right to grow,’ internally. If the cost structure isn’t right, the more you grow with it, the more losses you’re going to have. By the end of 2003, we thought we’d gotten the cost structure largely right. Where before we were working with an axe, we started working with a scalpel.”
2004 was marked with highlights. That year, GeoLogistics won the largest single new business contract in its history, which equaled more than 10% of net revenues. GeoLogistics also secured one of the few licenses as a non-Chinese company to operate there as a freight forwarder. Also that year, the EBITDA chart looked remarkable. At negative $22.1 million in 2001, EBITDA moved to $1.5 million in 2002, to $17.8 million in 2003 and to $32.6 million in 2004. 2005 estimates are in the $40 million range.
Dual Track Exit
Questor then hired Citigroup to explore a dual track IPO/sale process. On the decision to go dual track, Questor wasn’t playing around. “Sometimes you hear a sponsor is engaging in a dual track, but in the back of their minds they know they’re not going to go public, they’re just using the comp valuations of public companies to make the buyer pay up,” said Denious. But in the case of GeoLogistics, “Right down to the end it was a very close call of which one we wanted to pursue.”
Kuwait’s PWC Logistics made a top notch offer. Bear Stearns equity analyst Edward Wolfe tracked a dozen other deals in the industry and came up with an average transaction multiple over the last 10 years of 10.7x EBITDA. Questor sold GeoLogistics to PWC for a multiple of 14.1x, the biggest in the industry’s history.