Merger and acquisition (M&A) activity in the global transportation and logistics industry ended 2013 on a strong note with a 57% increase in deal volume and more than a 100% increase in deal value in the fourth quarter, according to analysis conducted by consulting firm PricewaterhouseCoopers (PwC), with the company’s research indicating more such deals should be conducted this year – especially within the U.S. trucking industry.
“Trucking and logistics are more fragmented than most other U.S. transportation modes [and] have relatively low barriers to new M&A,” Jonathan Kletzel, U.S. transportation and logistics leader for PwC, told Fleet Owner. “And, since trucking tends to underperform most other modes on the basis of profitability, M&A can help improve the overall performance.”
He added that M&A within trucking can help improve rates by reducing the competition for freight volumes, with acquisitions helping bring in new customers in a freight market that remains “a slow organic growth environment” in Kletzel’s view.
“Trucking and logistics … appear ripe for consolidation,” he pointed out, particularly since railroads have been highly consolidated for some time and airlines just went through a wave of consolidation in recent years.
The $95.6 million acquisition of drayage carrier Central States Trucking Co. (CST) and its Central States Logistics division this year by Forward Air Corp. is but one example of how “consolidation conditions” may be “ripening” within the industry.
With a seven terminal network and some 500 office employees and drivers generating $66 million in revenues for 2013, CST is expected to help Forward Air enter new markets and expand its customer base.
“For a number of years we have had the desire to enter the drayage space via purchase of a company with a scalable platform [and] CST not only provides that platform, but does so while achieving the high margins and low asset intensity that our shareholders have come to expect from us,” noted Bruce Campbell, Forward Air’s chairman, president and CEO in a statement.
He added that Forward Air acquired CST on a cash-free, debt-free basis with an adjustment for working capital, anticipating approximately $15 million in net present value of expected cash tax savings as a result of the transaction.
“The ideal time to secure the best price for a fleet is when the demand for fleet services is climbing. Therefore, we will see more fleet mergers [and] as the economy has recovered, we have seen a steady increase in demand for fleet services which translates into increased profits,” Max Safavi, managing director for Allegiance Capital Corp., explained to Fleet Owner.
“Right now, buyers are willing and able to pay premium prices for because they know they can get a good return on their investment,” he noted. “We will also see more fleets sold or merged, because a lot of fleet owners are aging and they have lived through the boom-and-bust cycles before. They know we have entered into an up cycle and if they miss this opportunity, it could be another five years before they have a similar opportunity.”
Safavi also pointed out that fleets with well-established relationships with key customers will be more valuable as it is easier and often less costly to buy a smaller fleet with a solid customer base than it is to win those customers through pricing or direct competition.
Other fleets that are extremely attractive rom an acquisition standpoint are those serving niche markets or attractive regional markets, he said. “They have the established customer base and they know how to provide specialized services, or they operate in a highly attractive market,” Safavi explained. “Either of these will make them more attractive and more valuable to potential investors.”
Trucking conglomerate CRST International Inc. provided an example of that strategic mindset when it acquired privately-held BESL Transfer Co. in January this year.
CRST – which currently employs more than 4,400 company drivers and office personnel, plus an additional 2,500 independent contractors, across the U.S. and expects to post revenues exceeding $1.3 billion for 2013 – said the acquisition of BESL complements its CRST Malone flatbed division.
“CRST is comprised of six specialized, niche transportation companies [and] we are always in search of companies to add to our portfolio that offer services that allow us to expand our capabilities with our customers,” noted Dave Rusch, CRST’s president and CEO, in a statement.
“The acquisition of BESL allows CRST to expand its flatbed operations nationwide footprint through its short haul, regional services and expanded agent base,” added CRST Group President John Gallardo. “For CRST and BESL it means improved fleet utilization and increased operating efficiencies.”
The CRST deal also highlights another trend PwC’s annual study of global transportation and logistics M&A activity identified: an acquisition focus on smaller companies that offer immediate “synergies” with the buyer’s operations.
For example, the firm noted that local market deals represented 71% of global M&A activity in the fourth quarter, continuing a trend that was apparent throughout 2013 with the proportion of local-market volume reaching a ten-year high in the full year of 2013.
“Local-market synergies can be easier to attain given the tendency for overlap in transportation networks and existing operations,” PwC’s Kletzel pointed out. “There could be or likely will see stronger times ahead [for M&A activity] supported by a continued global economic expansion and global industrial production. However, acquirers should remain cautious and continue their focus on small, local deals with more easily-achievable synergies. In addition, valuations seem likely to remain high due to competition for favored assets.”
Allegiance’s Safavi believes three additional reasons will help spur more U.S. trucking industry merger activity in 2014:
- Value multiples are increasing, meaning that buyers will have to pay higher prices for well-managed, well-positioned fleets;
- Money is cheap right now as banks are more willing and able to provide buyers the cash they need to purchase fleets and the financing rates are the lowest we have seen in decades;
- Size does matter as in most cases three small fleets with 100 trucks combined can’t operate as efficiently as one fleet with 100 trucks.
“Larger fleets are more efficient and cost effective, and one of the most cost effective ways to build a large fleet is through acquisitions,” Safavi stressed. “Also, when a larger fleet is doing well, they can afford to pay more for a smaller, attractive fleet that meets their strategic plans, because they know they will be able to use that fleet to quickly add to their profitability.”
That’s why he thinks 2014 will be a great year for trucking firms – especially small carriers – to sell.
“The economy is up, shipments are up, and demand for fleet services is up,” Safavi said. “If you own a well-managed, well-positioned fleet, now would be the perfect time to begin the sales process. Owners need to remember that selling can take nine to 15 months, therefore, they need to start the process now, if they want to complete it in 2014 or early 2015. As we all know the business cycle goes up and down. You never want to be caught trying to sell on the down side of a cycle.”
