Truckload sector ripe for acquisition activity

A move by Knight Transportation earlier this year to be in position to acquire some or all of a $450 million carrier is the latest – and largest – piece of evidence that acquisition activity is poised to increase significantly in the truckload sector

A move by Knight Transportation earlier this year to be in position to acquire some or all of a $450 million carrier is the latest – and largest – piece of evidence that acquisition activity is poised to increase significantly in the truckload sector.

Jon Langenfeld, chief analyst with investment firm Robert W. Baird & Co., said Knight entered into a largely unnoticed “consulting engagement” with a $450 million dry van and flatbed carrier operating 2,500 to 3,000 trucks primarily in the Southeast and Midwest – a good complement to Knight’s existing business segments and geography, he noted.

Langenfeld add that the initial terms of the deal gives Knight the right to purchase 49% of the carrier at a predetermined but undisclosed price and the right to purchase the remaining 51% at a price based on operating performance – with the “consulting” arrangement providing a way for Knight to manage the risks of something unexpected occurring.

Baird’s research indicates the carrier Knight is looking at had limited profitability in 2008 on revenues of $450 million but was unprofitable in 2009 despite pulling in revenues of $550 million.

Knight’s potential acquisition, while outsized, is but one indicator that such activity is increasing. BMO Capital Market’s transportation group, for example, expects first-half merger and acquisition (M&A) activity in the transportation and logistics sector overall to be 20% above the pace set in the second half of 2009, when 47 deals were completed. The group expects much larger deals to be completed in 2010, with more of the activity involving publicly traded companies.

“We’ve done more acquisition deals in the last three months than we did in all of 2009,” Lana Batts, managing partner at Transport Capital Partners, LLC, told FleetOwner. “While we haven’t had a lack of sellers over the last year, now we’re seeing people interested in buying – and that’s a good thing.”

She pointed to the group’s first quarter Business Expectations Survey that found 64% of larger carriers expect rates to increase in the next 12 months compared to 37% of carriers with less than $25 million in revenue. Smaller carriers thought rates were most likely to remain the same and are clearly more pessimistic about the future – which is one reason more small carriers are thinking about getting out of the industry, Batts noted.

The survey also found about 50% more carriers in the third quarter versus the fourth quarter in 2009 indicate they would be interested in selling their company - 27.8% compared to 19.2% - which is similar to the same percent expressing interest in February 2009.

Yet Batts also believes acquisitions are going to be a critical tool for truckload carriers in the months ahead as a low-cost way to boost capacity and freight volumes.

“First, there are economies of scale – the bigger guys just get better prices on parts, tires, trucks, fuel, etc.,” she said. “Second, shippers are driving this by requiring in their RFPs [request for proposals] and RFQs [request for quotes] that carriers have certain numbers of trucks.”

Finally, the costs of “internal expansion” are so much higher now – to buy trucks, recruit drivers, plus add dispatchers and technicians – that it may just be cheaper to acquire another company versus buying new equipment, she said; especially as new emissions control mandates are driving the sticker price of a basic new Class 8 tractor over $118,000 now.

“As long as an acquisition adds new lanes and customers – or helps support your current lanes and customers – you just may be better off buying another company versus new equipment,” Batts noted.

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