Canada Truckers Speed Post-Slump Merger Drive: Freight Markets

Canadian trucking companies are poised to announce the most takeovers in more than a decade, signaling confidence in the economy’s resilience as their U.S. and European peers hold back.

Canada’s 10 trucking acquisitions this year are up from four last year and one short of 2006’s record of 11, according to data compiled by Bloomberg. There were none in 2009, when the world’s 10th-largest economy was hit by a global recession. In the U.S., the 2011 total is 15, close to the 16 for 2010 and 13 in 2009. European data shows a similar pattern.

For companies such as Contrans Group Inc. (CSS), Mullen Group Ltd. (MTL) and TransForce Inc. (TFI), buying smaller haulers is attractive because Canada is likely to avoid the brunt of any global slowdown, their executives say. Canadian truck stocks may see gains even with the threat of more weakness in the country’s U.S. and overseas trading partners, investors say.

“If the economy is flat or maybe growing a little bit and if you are going to show any growth, you are going to show through acquisition,” said Murray Mullen, 55, chief executive officer of Mullen Group. “It’s all about who can outrun the bear, who’s got the best capital base, balance sheet.”

Shares in Mullen, based south of Calgary in Okotoks, Alberta, have returned 26 percent so far this year, compared with a 5.5 percent decline for the country’s main stock index. TransForce shares have returned 4.3 percent while Contrans, which has made four takeovers this year according to Bloomberg data, has lost 12 percent.

Surviving the Crisis

David Newman, an analyst with Cormark Securities Inc. in Toronto, cut his rating on Contrans to “market perform” from “buy” on Aug. 8. He said in an e-mail yesterday the company has “little to no organic growth prospects.”

The Bloomberg U.S. Truckload Trucking Index has declined 12 percent this year.

“One of the ways TransForce has done well over the last decade is acquisitions,” said Paul Bloom, an investment manager who has TransForce as the second-largest stock in his Blue Ribbon Income Fund. “We like its exposure to the economy and we particularly like the management.” Bloom is the founder of Toronto-based fund manager Bloom Investment Counsel Inc., which oversees C$1.5 billion ($1.53 billion).

The takeovers may boost profits by building market share or adding equipment cheaply at a time when trucking is recovering, said Michael Burt, an industrial economist at the Conference Board of Canada in Ottawa. Still, he said, the acquisitions won’t give the buyers the clout needed to raise prices.

Barriers to Entry

“There are very few barriers to entry,” Burt said. “It’s basically a guy with a truck. You have to have a lot of consolidation before you get to the point where you have a lot of market power.” The Board’s leading indicator for trucking has risen for six straight months through July, he said.

Canada recouped jobs lost in the recession faster than any other Group of Seven country, with its economy supported by higher prices for exported commodities such as wheat and gold. None of the country’s banks had to be bailed out in the credit crisis, and existing home prices are at a record high. By contrast, U.S. house resale prices are 32 percent below their April 2006 pre-recession peak, according to the S&P/Case-Shiller index.

Truckers hauled 58 percent of the C$501 billion of Canada’s trade with the U.S. last year, followed by 17 percent on railways and 14 percent via pipelines, according to the federal transportation department.

Risks Increased

Bank of Canada Governor Mark Carney told lawmakers Aug. 19 that while the country’s economy may have contracted in the second quarter, it will rebound in the second half of the year on business and consumer spending. He also said the risks of a slower global recovery have increased in recent weeks because of Europe’s debt crisis and the loss of a top U.S. credit rating.

Alain Bedard, chief executive officer of Montreal-based TransForce, said he’s buying because of the “family issue” of aging entrepreneurs looking to sell their companies. The industry needs consolidation, he said, because there are “too many small companies with high leverage.”

“The reason we are back buying companies is because we see good opportunities,” Bedard, 58, said in a telephone interview. “Instead of bringing our debt down all the time, we invest.” The company sold C$85 million of convertible debentures this month, in part to make acquisitions.

Mullen said his oilfield services and trucking company plans to make more acquisitions even with the risk of another slowdown, after reporting record revenue in the second quarter.

“Some of the owners are getting up to the age where they need to look at monetizing” and some smaller companies are also struggling to raise capital and attract workers, he said.

‘Lot of Calls’

Contrans Chief Executive Officer Stan Dunford, 62, has been the busiest this year, with acquisitions including the purchases of Quebec-based Enterprises S&S and Logistique Barthelemy last month. Dunford said he is “getting a lot of calls” from his peers. The company is based in Woodstock, Ontario, along the highway between Toronto and Detroit and home to one of Toyota Motor Corp.’s Canadian factories.

Dunford, who has been with Contrans since 1988 after starting in the industry at 18 years old, said his main goal is avoiding growing too fast.

“I hate debt,” he said. “If it’s not a really good deal we won’t do it.”

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.

To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net.

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