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Merger Positions Chep for Growth
Chep's two parent companies propose a merger that would give Brambles Industries ownership of Chep; merger could position Chep for renewed growth.
Date Posted: 6/1/2001
Chep’s two parent companies have proposed a merger in which Australian-based Brambles Industries would gain ownership of Chep. The merger could position Chep for renewed growth, according to industry analysts and consultants.
Chep currently has two parent companies, Brambles and British-based GKN. The two companies have been discussing how to put Chep and other industrial service joint ventures under the same ownership for several years, and negotiations intensified earlier this year.
Under the terms of the merger, GKN’s share of Chep and Cleanaway joint ventures and some other GKN businesses will be folded into Brambles. Brambles will control 57% of the new business and GKN, 43%; the 57-43 split was based on the relative values of the contributed businesses. GKN would separate its industrial services operations and put them in a new British company, Brambles Industries PLC, which would be combined with the Australian Brambles Industries Ltd. The ‘new’ Brambles would have its headquarters in Australia.
The ‘new’ Brambles essentially would be built around the three key businesses of Chep, Cleanaway, a waste management business, and Recall, a document management business. They account for about two-thirds of the new group’s $3.6 billion annual revenue.
The merger is subject to approval of shareholders of both companies and by regulatory authorities. It is expected to be completed by August.
The ‘new’ Brambles would be headed by C.K. Chow, GKN’s CEO since 1997. It will have "a greater growth profile" than if Brambles continued under its existing structure, said the entrepreneur-minded Chow. He will focus on "maximizing" the three main businesses through "organic growth and acquisitions" and already has begun looking at small, ‘bolt-on’ acquisitions.
In a single entity, the higher-growth, higher-margin units such as Chep should be able to raise more equity and debt more readily and on better terms.
One report called prospects for growth "palpable" while another referred to Chep as a "fantastic business with fantastic growth prospects." Chep has only 35% penetration in fast-growing consumer products markets in Europe and about 30% in North America, compared with the 80% it has achieved in Australia. Other growth markets include pharmaceuticals, healthcare, home and gardening goods.
A consultant in the logistics and transportation industry who is very familiar with Chep’s operations agreed that the new corporate organizational structure likely will spur new opportunities for Chep. The merger will trigger more growth both in Canada and the U.S., predicted the consultant, who asked not to be identified. "Chep’s got to be licking its chops at the opportunity that lies ahead for them...Clearly, there’s nobody in the way."
"It certainly streamlines the upper management and decision-making process," which will be "less cumbersome" as a result of the new organizational structure, he added. The merger also will give Chep greater independence to be a deal-maker and create new logistics schemes, he suggested.
At the same time, the merger likely will opens the door to greater scrutiny of Chep’s operations, the consultant said, including its lapses. "Quality has been sacrificed for growth," he said. In order to accommodate growth, Chep relaxed controls of the pool, resulting in higher levels of damage and losses and reduced pallet quality. "Those will come under tougher scrutiny now."
Another supply chain consultant suggested the merger would free up cash that Chep may use to upgrade aging information systems. Improvements in information technology would allow Chep to be more efficient in its overall operations, said Mike McCartney, a principal for Quality Logistics Management.
"When the information systems get put in place, that will enable management to do a better job of meeting customer needs, which would suggest a realignment in their North American operations," said Mike. "I think they’re going to know their customer better," and, as a result, will be in a position to offer them greater services.
However, the other consultant disputed McCartney’s assessment of Chep’s information technology resources. "Chep consistently invests heavily in information technology," he said. He characterized Chep’s information technology systems as "leading edge, state-of-the-art" and noted the company has considerable information technology staff. Chep has always heavily emphasized information technology because its business is so heavily tied to processing transactions as pallets are moved from one customer account to another, he said.
"I think you’ll see perhaps a much more aggressive assault on the Canadian pallet market," added Mike, because of the competitive tension that exists in the Canadian market.
The merger also may energize Chep to expand in the U.S., he said, although not as aggressively. "The dock sweep operations for Wal-Mart have been very successful. Look for them to replicate that for other retailers." However, others in the pallet industry contend that Chep’s program for Wal-Mart has neither been that profitable nor an operational success.
Chep already has a leading position in the Canadian market, and the Brambles-GKN merger may enable it to increase that lead. "The one thing that’s held them back is their information systems," said Mike. "Strategically it’s a smart move to put as much money into that type of system as one can. That way they’ll be able to do more with less people."
Chep recently announced the addition of three new depots in Canada and the expansion of two others. The new and expanded depots will strengthen services to manufacturers, distributors and retailers, according to Chep.
Chep, like Cleanaway, has enjoyed success, but it has been limited to a degree by the dual ownership structure. It is a growth businesses but capital intensive. Under the existing organizational structure, Chep and Cleanaway compete for capital and management time with operations that are 100% owned by Brambles and GKN. They also operate under a framework in which both parties must agree to their strategies and contribute funding, which has precluded Chep from extending itself into other areas of supply chain management.