Brazil’s largest road logistics company JSL proposes merger with competitor Tegma

RIO DE JANEIRO, BRAZIL – Simpar (SIMH3) said Friday, July 2, that its subsidiary JSL (JSLG3), Brazil’s largest road logistics company, has filed a business combination application with Tegma (TGMA3), the second-largest company in the sector.

The statement said the merger of the two companies would create a company with combined gross sales of R$6.1 billion and earnings before interest, taxes, depreciation, and amortization (Ebitda) of R$827 million.

“Adding the activities of JSL (including the mergers and acquisitions carried out) and Tegma, the combined company would generate gross sales of R$6.1 (US$1.2) billion in the last twelve months ending March 31, 2021, representing an increase of R$2.8 billion and a growth of 86% of JSL’s gross sales in the same period (excluding mergers and acquisitions),” Simpar said.

Shares rose in response to the news: at 10:22 AM (Brasília time), JSLG3’s shares were 11.26% higher at R$13.24, while TGMA3 was up 16.42% at R$26.65. Simpar’s papers, in turn, rose 3.52% to R$57.71.

The company sees potential synergy gains through dilution of fixed costs and cross-selling through a greater offering of services from JSL to Tegma customers. The business combination will also “contribute to the combined company’s access to capital markets and support the agenda of organic growth and acquisitions in line with JSL’s strategic plan,” the statement said.

According to the proposal, amalgamating the company’s shares would be based on an exchange ratio under which “each shareholder of Tegma will receive the value of R$15.00 and 0.7495248702 shares of JSL for each of its Tegma shares.”

The cash and stock transaction includes the payment of R$989 million to Tegma shareholders and 49.4 million new JSL shares. Following the transaction, current Tegma shareholders will hold approximately 15% of JSL’s total equity.

Tegma commented that the proposal was made without prior inquiry or consultation with the company’s boards. According to the company, the proposal is subject to certain conditions: (a) the approval by the companies’ boards of directors of the documents necessary for the execution of the transaction, in particular, the protocol and rationale for the merger, which will contain representations and warranties customary for transactions of this nature; (b) the approval of the shareholders of JSL and Tegma in a general meeting; and (c) the prior approval of Brazil’s competition regulatory agency CADE.

In light of the proposal, the chair of the Tegma Board of Directors has called an extraordinary meeting of the Board to consider the proposal and decide on such action as it deems appropriate.

XP highlights that the proposal represents approximately R$23.90 per Tegma share (only about a 4% premium over the closing price). Analysts see this valuation as attractive, about 6 times the EV/Ebitda ratio expected in 2021 versus about 8 times for JSL.

Analysts note that the announcement is in line with JSL’s recent strategy to grow through acquisitions and complements one of its recent acquisitions (the purchase of Transmoreno, also in the automotive sector).

If the transaction is approved, XP sees it as positive for JSL, as it is in line with its mergers and acquisitions strategy, Tegma has good returns and an operation with strong cash generation, and the price appears discounted.

Risks include the depth of the impact of the automotive crisis on Tegma’s business (however, analysts point out that Tegma has proven resilient in times of crisis in the past due to its asset-light model). It is public knowledge that Tegma has been the target of investigations into allegations of price control/manipulation in the automotive transportation services sector.

JSL OWNED BY THE SIMÕES FAMILY

JSL (Júlio Simões Logistica) is a Brazilian conglomerate intermodal logistic company owned by the Simões family, among the 150 wealthies clans in Brazil. The company was founded in 1956 in Mogi das Cruzes in Greater São Paulo by Júlio Simões, is headquartered in Mogi das Cruzes and its corporate office is located in São Paulo.

The company operates in the business segments of supply-chain-dedicated services, cargo and passenger transportation, outsourced fleet management, vehicle sales, and car rental.

JSL is present in all regions of Brazil, with 144 operational branches in 15 states, and is also in Argentina, Chile, Uruguay, and Venezuela. The company has more than 3.600 trucks, 4.200 trailers, 16.400 cars, 941 buses, and 1.700 tractors and equipment, with more than 16.000 employees.

Nowadays, it is the most significant road transportation enterprise in Brazil.  In 2015, JSL had revenue of R$8.5 billion. [Current figures are not divulged by the company.]