Transport M&A Set for Rebound on Trucking Valuations: Freight

Transport M&A Set for Rebound on Trucking Valuations
Celadon Group Inc. signage is displayed on a truck parked at company headquarters in Indianapolis, Indiana. Photographer: Alan Petersime/Bloomberg

Ground-transport companies are showing fresh interest in mergers amid the convergence of new U.S. regulations, tight credit and trucking stocks at some of the cheapest valuations since 2009.

At least $2.7 billion of truck, leasing, transport-services and rail purchases involving North American buyers or targets were announced in 2011 through yesterday, 32 percent more than in 2010, based on data compiled by Bloomberg. More deals are likely, said Jason Seidl, a Dahlman Rose & Co. analyst.

“Smart buyers come in when things are depressed,” Seidl said in an interview from New York. “People are focusing right now on making longer-term investments, and that’s why transports are coming up.”

Acquisitions would help truckers refresh fleets and add drivers amid an industry shortage. Celadon Group Inc. said Oct. 19 it would buy tractors and trailers from Frozen Food Express Industries Inc., a week after disclosing a 6.3 percent stake in USA Truck Inc. and proposing talks on an “association.”

The Bloomberg data cover pending and completed deals from $5 million to $1 billion, a transaction range typical for industries such as trucking, logistics and short-line railroads.

Brad Jacobs became chief executive officer of XPO Logistics Inc., an arranger of freight shipments, after his Jacobs Private Equity LLC invested as much as $135 million in the St. Joseph, Michigan-based company in September. Acquisitions are already on his mind.

“We’re talking to a wide range” of possible targets, Jacobs said in an interview. “Our sweet spot are companies with revenues between $30 million and $200 million.”

External Growth

Celadon is among a group of transport companies that Seidl identified in a note this month as having “external growth” strategies. His list includes trucker Knight Transportation Inc., logistics provider CH Robinson Worldwide Inc. and short-line railroads Genesee & Wyoming Inc. and RailAmerica Inc.

Each of the four latter companies has told analysts in calls since September about plans for future purchases or the integration of recent deals. Possible targets for acquisition include truckers Vitran Corp. and Saia Inc., Seidl said.

Saia Treasurer Renee McKenzie and Vitran Chief Financial Officer Fayaz Suleman didn’t respond to voice mails seeking comment. Both companies are less-than-truckload carriers, hauling goods from more than one customer in each trailer.

‘Ebbs and Flows’

Consolidation in that industry has been under way for at least two decades, marked by “ebbs and flows,” said Seidl, who has “buy” ratings on Saia and Vitran.

“We’re heading towards the top of the wave as opposed to the bottom,” he said.

Trucking valuations as measured by price-earnings ratios are improving as profits recover from the recession.

The P/E of the S&P Midcap Trucking Sub Industry Index of four carriers including J.B. Hunt Transport Services Inc. was 19.72 on Sept. 30, the lowest since 2009’s first quarter, according to data compiled by Bloomberg. The S&P Smallcap Trucking Sub Industry Index, which includes Knight, had a P/E ratio of 22.15, also the cheapest since that period.

Both indexes gained at least 24 percent through yesterday since U.S. stocks touched their 2011 lows on Oct. 3.

Among the companies out of favor with investors was USA Truck, which plunged 38 percent this year through Oct. 10, a day before Indianapolis-based Celadon reported its holding. Both are truckload carriers, which carry goods from only one customer in each trailer. Van Buren, Arkansas-based USA Truck turned down Celadon’s request for a meeting.

‘Moving Forward’

Celadon plans to “evaluate our options in terms of moving forward,” Chief Executive Officer Steve Russell said yesterday on a conference call.

Smaller truckers may find it easier to sell assets to raise cash than borrow for new trucks as bank standards tighten, Russell said in an interview. Monthly new business reported by the Equipment Leasing & Finance Association averaged $5.7 billion in 2011 through September, compared with $6.9 billion a month for all of 2007.

Celadon’s asset purchase from Frozen Food Express covers “substantially all” of the Dallas-based company’s dry-van fleet of about 435 trailers and “most” of 290 tractors previously targeted for disposal, Frozen Food Express said. Financial terms weren’t disclosed.

Driver Shortage

Drivers are a prize as well, as pending federal rules to limit work hours threaten to exacerbate the worst shortage since 2009, Seidl said. Already in place are rules helping companies assess job prospects’ record on the road, weeding out bad risks while also shrinking the pool of available drivers.

That shortfall “alone can be the tipping point to say, ‘We’re going to engage in this M&A activity,’” said Paul Bingham, economics practice leader at consultant Wilbur Smith Associates in Arlington, Virginia.

For smaller freight brokers, the struggle to find loans may make it more tempting to sell the company, said Jacobs, the CEO of XPO Logistics.

Only 25 of the more than 10,000 licensed truck brokers in the U.S. have annual revenue of more than $200 million, said Jacobs, the co-founder and former CEO of United Rentals Inc. That fragmentation helps “support the thesis that consolidation is in the future,” Jacobs said in an interview.

Caterpillar, Railroads

Caterpillar Inc. is considering selling its third-party logistics business, which has stirred “significant interest from around the world,” according to a statement this week from the world’s largest maker of construction and mining equipment. A decision is due by year’s end, the company said.

Size is a consideration for some of the companies staying on the sidelines.

North America’s largest railroads aren’t seeking mergers because of the regulatory challenges in an industry with only four major carriers in the U.S. and two in Canada after decades of tie-ups, Union Pacific Corp. CEO James Young said in an interview last month.

Truckload carriers also don’t reap the same benefits from consolidation, because carrying goods from one customer in each trailer means that mergers won’t cut equipment or staffing needs, according to David Ross, a Stifel Nicolaus & Co. analyst in Baltimore.

Consolidation among less-than-truckload operators also may not work as advertised. YRC Worldwide Inc. grew through acquisitions in the last decade and then faltered as freight shipping slumped in the recession. It trades at less than 10 cents a share after restructuring to avoid bankruptcy.

“Large truck mergers have not worked well historically,” Ross said in an interview.

‘Tuck-In Acquisitions’

Ross isn’t expecting a jump in trucking mergers. Rather, he said he sees the “potential for larger guys buying small carriers, tuck-in acquisitions” to obtain cheap assets, good drivers and new customers.

“There’s a great difference in terms of strategic reasons about why M&A occurs based on who’s doing the buying,” said Bingham, the consultant. “If I’m a financial investor that’s very different from if I’m an operator who’s in that space already.”

Outside investors may be avoiding the industry as companies work to stabilize profits after the recession, Bingham said. That may change in the future as truckers take advantage of tight capacity and rising demand for shipments, he said in a telephone interview.

“There’s potential for those firms to do better, which then would attract investors who are looking to capture some of that upside,” he said.

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