ELDs, other outside factors continue to make environment ripe for consolidation
The merger of Knight Transportation and Swift Transportation may be the transportation highlight for the year, but there has plenty more activity revolving around mergers and acquisitions (M&A) in 2017, with no letup in sight.
“With the implementation of the ELD mandate next month, small carriers may become less numerous as their ability to offset their inherent cost disadvantage via cheating on hours of service will be largely taken away,” John Larkin, managing director of transportation and logistics at Stifel Equity Research, tells FreightWaves. “So, with a tight supply/demand dynamic resulting, pricing should improve and margins should expand. The better performing carriers can harness their enhanced cash flows to more aggressively consolidate the industry.”
According to Thomson Reuters data, there have been 44 publicly announced deals this year. In all of 2016, there were only 36. Todd McMahon, managing director of investment bank Capstone Partners, says that number is low as most deals are private and never announced.
The rate of M&A activity this year is surprising to some.
“It’s (the pace of acquisitions) been as busy as we’ve seen it since we started the business 13 years ago,” Jim Parham, managing partner of M&A advisory firm Transport Capital Partners, told Reuters. “We expect this pace to continue, if not accelerate, in the coming months.”
According to PriceWaterhouseCooper (PwC) global transportation and logistics (T&L) deals soared in the second quarter of 2017, rising 127% over the first quarter and 26% year-over-year. Total value in second-quarter deals was $45.1 billion. Volume was also up, with 5% more deals than the first quarter and 28% more deals than the second-quarter of 2016.
That pace did not significantly slow in the third quarter. The firm said that global M&A activity saw 71 deals worth $43.3 billion, a 7% decrease over the second quarter. It was the second highest level of quarterly deal volume and value in the past three years, though, and five of the 10 largest deals of the year occurred in the third quarter.
PwC tracks not only trucking, but also ocean shipping, logistics and air freight and passenger air. In the transportation & logistics sector, PwC tracked 13 “local” deals (deals involving only North America companies) in North America worth $4.3 billion; three “inbound” deals (deals involving foreign investment in North America businesses) valued at $1 billion; and three “outbound” deals (North American investment in foreign businesses) worth $1.2 billion.
For the year, PwC says that total global deal value through three quarters was $110.3 billion, which is off just 8% from the entirety of 2016.
“Some of the notable contributing factors to these trends are the continued buoyancy of the T&L deal market in Asia, which accounted for almost half of all deal volume in YTD 17 and the increasing influence of financial investors in the sector, whose quarterly contribution to deal value in YTD 17 increased by almost 50% when compared with FY15 and FY16,” the firm says.
Financial investors poured money into deal-making in the third quarter, posting a 78% increase in value to $26 billion despite the lower volumes.
On a global scale, PwC notes that there is continued consolidation ongoing in the shipping and trucking sectors and increased participation from financial investors. “We would expect to see the continued influence of these themes for the rest of 2017 and into 2018,” it said in the report.
That consolidation is likely being seen here in the U.S., in part due to the difficulty fleets are having in seating drivers.
“[I] believe that many truckers feel as though organic growth is a losing proposition given the difficulty in seating existing trucks, much less incremental trucks,” Larkin says. “So, the alternative is to acquire an under-managed operation, bring it up to par with the mothership’s operating standards, while in the process creating some incremental value.”
In some cases, Larkin surmises, acquisitions may be driven by shipper demands to expand into new areas or simply a carrier’s desire to open up new areas of revenue by adding an existing known quantity in that area.
“Of course, the acquisitions also can be used to expand a carrier’s geographic footprint, build lane density, acquire specific new customers, or to develop a complimentary service offering,” he notes.
Factors working in favor of acquisition strategies right now is the economy, which continues to maintain a healthy outlook, low interest rates and historical high equity valuations, Larkin points out.
If things continue as they are, we may see even more deals in the fourth quarter and continued activity into 2018.
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