Trucking merger and acquisition (M&A) deals continue at a steady pace despite more restricted access to credit and loans, indicating to at least one analyst that the industry is on the road to recovery.
“The questions we’re getting now are whether these deals are being done for strategic reasons or out of necessity and distress. While there’s certainly a flavour of the latter, it’s not widespread,” according to Edward McGuire, managing director in the BMO Capital Markets Transportation Group. “The level of deals will be off this year, certainly, but nowhere nearly as bad as we thought back in January. In January, the outlook [M&A] activity was very bleak.”
According to a new report by BMO Capital Markets, the volume of M&A activity in the transportation sector as a whole remained comparatively strong in 2008 and continued to hold up though the first half of this year.
“Despite market challenges, we are seeing modest deal flow in the transportation sector in the first half of 2009. Deals getting done, however, are characterized by longer time periods for financing and due diligence,” noted McGuire.
“Overall, M&A activity for transportation industry service providers remained relatively strong last year with a total of 142 announced transactions, a decrease of only 2% from the number of deals recorded in 2007,” he said. “While the turmoil in the credit markets has affected deal volume – particularly in transactions where private equity firms were involved – consolidation in the transportation sector continued as strategic buyers looked to broaden service offerings and expand geographic presence.”
Other M&A indicators tallied by BMO in its report include:
- Some 71% of transportation buyers in 2008 were strategic, compared with 57% and 74% in the first and second halves of 2007, respectively.
- The logistics sector saw the highest number of M&A deals with 40% in 2008.
- Truckload merger and acquisition activity remained consistent year-over-year, while railway increased to 15% of 2008 deals from only 6% of the announced deals in 2007.
However, McGuire cautioned that the numbers do not indicate that transportation – and especially trucking – is out of the woods yet.
“While it appears that fuel prices may no longer be an eminent concern, transport companies will continue to face significant challenges into 2009, burdened with low freight volumes and potentially restrictive capital structures,” he said. “More than 127,000 vehicles, including 39,000 trucks in the third quarter alone, disappeared from the highways in the first nine months of 2008. This 6.5% reduction of the U.S. trucking fleet surpassed the previous record of approximately 117,000 vehicles in 2000.”
Still, the steadiness of trucking M&A deal making activity indicates to McGuire that many in the industry believe the freight market has reached bottom.
“You simply don’t ‘lever up’ in this business – buying other companies to acquire freight lanes and to expand your service territory – if you believe the outlook for freight is poor,” he explained. “We’ve had big declines in inventory levels this year – $100 billion in the first quarter; $87 billion in the second quarter – through the summer. It’s to the point where if there is any uptick in the economy, there will be a need to increase inventory – thus increasing freight demand. So, for that reason, we’re guardedly optimistic about the outlook for trucking right now.”