Smaller and more flexible delivery networks are being viewed as the better freight transportation model says Strategyamp Photo by Sean KilcarrFleet Owner

Smaller and more flexible delivery networks are being viewed as the better freight transportation model, says Strategy&. (Photo by Sean Kilcarr/Fleet Owner)

Transportation deal-making surge only half the story

Metamorphosis of delivery systems driving more localized deals

A surge in merger and acquisition (M&A) activity in the transportation industry over the last year is being driven by an ongoing “metamorphosis” of delivery networks, especially as smaller, more localized motor carriers are being more widely viewed as the best freight hauling option for the future.

“We see a world of shrinking supply chains, where smaller and more flexible delivery networks are being viewed as the better model versus larger national networks for freight,” Andy Schmahl, a principal within the Strategy& division of consulting firm PricewaterhouseCoopers (PwC US) told Fleet Owner.

“Shippers are at the heart of this,” he said. “They want more real-time transparency of goods in transit: not every two days or two hours but were it is right now.”

Schmahl added that large national “legacy” coast-to-coast networks not only lack such visibility to a degree, but also suffer from the “ripple effect” of delays due to traffic congestion, the weather, etc.

“If one spoke of the legacy network experiences problems, the entire network suffers,” he explained. “Localized carriers are more able to cut off the bleeding. And because they are local, they can have later pickups.”

Thus Schmahl believes linking 20 or 50 local providers together to create broad freight delivery networks, rather than one carrier running such a network, will be able to better meet supply and demand in real time, while also providing better flexibility to avoid or work around delays.

As a result, he thinks smaller motor carriers will be the ripest target for mergers and acquisitions going forward, despite PwC data indicating that “megadeals” valued at $1 billion or more drove deal-making volume last year.

Total transportation industry deal value nearly doubled in 2015, according to PwC’s Intersections quarterly analysis report, topping $172.7 billion in announced deals, which is a “major uptick” from the $87 billion recorded in all of 2014.

That surge in deal-making value is largely the result of nine megadeals announced in the fourth quarter, totaling more than $61 billion. Overall, “megadeals” totaled 28 transactions in 2015, worth a total of $124.9 billion, up from 17 transactions worth $37.2 billion for all of 2014.

“The U.S. was an especially attractive target for large-scale M&A with eight megadeals, totaling 41% of the overall megadeal value,” noted Jonathan Kletzel, PwC’s U.S. transportation and logistics leader.

Yet he stressed that local deals remained the preference of transportation M&A activity in 2015, representing 59% of all deal activity.

“This increase within the U.S. can be attributed to domestic companies struggling to grow organically and the unprecedentedly low finance rates,” Kletzel pointed out. “As strategic investors in fragmented industries such as trucking and shipping continue to follow an inorganic path of attaining growth and scale, we expect consolidation to continue, leading to elevated deal values in the year ahead.”

Yet local deals remained the preference of transportation M&A activity in 2015, representing 59% of all deal activity. However, cross-border transactions drove the majority of deal value (51%) last year; a major reversal from 2014.

PwC’s report also noted that cross-border deal value increased by more than three times to $114.9 billion, with deal volume increasing by 31%,  as large international players within the transportation sector continue to expand their international operations and service offerings in efforts to develop global transportation networks.

“Looking ahead at 2016, we remain optimistic that M&A will continue as both the domestic and several foreign economies are poised for growth however; commodity pricing pressures will likely continue to have mixed effects on the various industries within the sector,” Kletzel said.

“Lower oil prices are reducing airline and trucking companies’ operating costs causing some companies to return capital to stakeholders versus funding further fleet expansion via M&A,” he added.

“Volatility in the commodity market continues to negatively impact the railroad industry, causing a shift in focus towards intermodal growth in efforts to offset headwinds,” Kletzel said. “As more companies look to control a greater percentage of the value chain, this should lead to intermodal M&A growth across modes.” 

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