Otto Group seeks strategic investor for Hermes

Germany’s Otto Group is seeking a strategic investor, either from the logistics or e-commerce sectors, to buy a minority or possibly majority stake in B2C delivery subsidiary Hermes to speed up its international growth and support a forthcoming €500 million investment programme.

The Hamburg-based retailing group believes that although Hermes has a strong market position in Germany, the UK and France, a strategic investor will help the B2C parcel specialist to grow faster, especially in other markets, according to German media reports. But it has no plans to completely sell Hermes, which is an important strategic asset for the group.

An Otto Group spokesman declined to comment to CEP-Research today on several articles, including in financial daily Börsen-Zeitung, business daily Handelsblatt and Manager Magazin, which all reported on the plans.

The Börsen-Zeitung wrote that Otto Group is seeking a strategic partner for ‘the biggest parts’ of its parcel delivery business Hermes, and has put the Hermes businesses in Germany, the UK and France “in the shop window”, with the support of investment bank Rothschilds.

International online retailers or logistics companies are possible partners for the planned strategic alliance but the investor would have to fit “culturally” to Hermes, according to the newspaper, which cited market sources. Otto Group plans to offer a minority stake but would be open to selling a majority stake in Hermes Europe. The retail group would definitely want to retain a minority stake in order to retain influence over strategic decisions.

However, if the search for an investor is unsuccessful, Hermes would be able to continue growing profitably. Investments of about €500 million are planned for Hermes over the next three years, the newspaper noted.

Hermes Europe is the holding company for the parcel delivery businesses in Germany, UK, France, Austria, Italy and Russia as well as several smaller businesses such as German same-day delivery firm Liefery, e-commerce services provider Hermes Nextec and cross-border e-commerce provider BorderGuru. Hermes Europe had turnover of about €2.5 billion last year, representing 80% of Hermes Group revenues, with about 30% of its 766 million parcels generated from Otto Group’s various retail businesses, and 70% from other customers. The other Hermes Group businesses are small specialist firms.

In terms of potential investors from the logistics industry, Manager Magazin said that Deutsche Post DHL is not a potential investor in Hermes due to cartel reasons. But the situation could be different with France’s La Poste, which owns the DPD network, the business magazine wrote briefly.

Experts noted that DHL Parcel is number one and Hermes number two in the German parcels market, making regulatory approval for any financial stake very unlikely. Similarly, Royal Mail, owner of the GLS parcels network, is not considered a potential investor due to the UK market situation. But a combination of DPD and Hermes would be a different situation, generating B2B/B2C synergies and creating a strong competitor to DHL in Germany as well as to Royal Mail in the UK. Whether French market leader La Poste would be allowed a stake in smaller rival Mondial Relay (Hermes France) is unclear.

Regarding e-commerce players, Handelsblatt named Chinese e-commerce firm JD.com, which wants to expand in Europe, as a potential partner, especially as Otto Group and JD cooperated three years ago on a joint project that was recently ended. Larger rival Alibaba Group might also be interested in investing in a European delivery network for its large volumes of Chinese exports, observers added.

Another possible interested party, according to experts, could be cash-rich US supermarket giant Walmart, which has embarked on a new strategy of international expansion through partnerships as well as acquisitions. It has teamed up with JD.com and Japanese e-commerce group Rakuten and is in the process of buying Indian e-commerce market leader Flipkart for a massive $16 billion.

In contrast, Amazon has apparently been ruled out as a potential investor. The US e-commerce giant is a valuable customer for Hermes, accounting for about 20% of its volumes, and this share is planned to be maintained as Hermes grows. But Amazon is seen as too strong a competitor to Otto Group to become a strategic partner.

Otto Group executives have signalled the new strategy for some time. CEO Alexander Birken said last year that the family-owned group was ready to open up some of its businesses to external investors as it targeted growth to revenues of €17 billion by 2022. In a first move, it sold a 29% stake in fashion start-up About You for $300 million to a Scandinavian retailer earlier this year.

Then, in July this year, Kay Schiebur, the group’s new board member for services, whose responsibilities include Hermes, told German transport newspaper DVZ that he wanted to focus in the coming weeks and months on last-mile delivery cooperations with strategic partners, including competitors, “who fit us culturally”…and “who have a similar mindset”. His comments came shortly after a change of top management at Hermes Germany.

According to CEP-Research information, the search for a strategic investor is separate from the recent partnership between Hermes Germany and fast-expanding US company SEKO Logistics. Under this agreement, Hermes Germany is taking over the two SEKO branches in Germany and will cooperate internationally with SEKO, which has a clear M&A agenda.