Update: Hub Group sells Mode Transportation for $238.5 million to PE Firm

Hub Group chief executive David Yeager

Transportation firm seeks to centralize operations.

Hub Group sold its Mode Transportation subsidiary as part of a previously announced move to centralize its operations and move away from  independent owner-operator networks.

Illinois-based Hub said Mode will be sold to an affiliate of York Capital Management, a New York-based diversified investment manager, for approximately $238.5 million with approximately $20 billion under management. .

Hub’s primary focus is intermodal, and it has sold a 3PL that according to a transcript of the company’s most recent earnings call, is in solid financial shape. On that call, Donald Maltby, Hub’s president and COO, said Mode had a “very strong double-digit growth across all services lines” in the second quarter, and had was developing new technology applications to serve its 3PL business.

But Mode was dwarfed within Hub by the intermodal division. In the second quarter, the intermodals segment had revenue of $882 million and net income of $24.8 million. The Mode segment’s corresponding numbers were $314 million and $7.1 million. Gross margin at Mode was 11.5% while operating margin was 2.3%. 

“Mode has an excellent management team, with a strong, solid agent base and loyal customers,” Hub CEO David Yeager said in the statement. “While Mode has been very successful, there was a lack of strategic alignment with Hub’s centralized business model.”

In Hub’s 10-K report filed with the SEC earlier this year, it said Mode had about 173 agents. 

On that earnings call, where Yeager announced the review of Mode’s future, Yeager said much the same thing as in the prepared statement on the sale. “While Mode has been quite successful in retaining and growing its client base and portfolio of services, there is a lack of strategic alignment with Hub’s centralized business model,” he said on the call, with the transcript provided by SeekingAlpha. “It is our intent to redeploy capital derived from a sale into acquisitions of new service lines, existing businesses and technology.”

According to the prepared statement, the sale price of Mode was approximately 10X Mode’s adjusted EBITDA for the year ended June 30. On the earnings call, after Yeager had said he would not discuss Mode further, he did receive a question from analyst Scott Group of Wolfe Research, who noted that the 2011 acquisition of Mode was about approximately 11 times trailing EBITDA. “Is that a fair way to think about valuation today on Mode?” he asked. But Yeaqer, reiterating that they were not going to say more on Mode than in the initial statements, swatted away the question.

Hub Group chief operating officer Don Maltby said the company was going to look at alternatives for Mode, which markets to small to medium-sized customers through a network of independent owner-operators. 

“While Mode has been quite successful in retaining and growing its client base and portfolio of services, there is a lack of strategic alignment with Hub’s centralized business model,” Maltby said in a July conference call. 

 Hub Group chief executive David Yeager said Mode, too, “is an excellent company … But if you look at it, it’s basically the same services we have, except in a decentralized agent structure versus our centralized structure.”

Proceeds from the sale will be put into new service lines, existing businesses and technology. The sale does not include the Temstar business which is being retained by Hub Group and was previously included in the Mode segment for financial reporting purposes.

“Mode is an exceptional agent-based transportation solutions provider differentiated by customer-specific expertise, offerings across all modes of freight transportation and leading edge technology and analytics,” said Mode President Jim Damman. 

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Michael Angell, Bulk and Intermodal Editor

Michael Angell covers maritime, intermodal and related topics for FreightWaves. His interest in transportation stretches back several generations. One great-grandfather was a dray horseman along the New York waterfront and another was a railway engineer in Texas. More recently, Michael has written about the shipping industry for TradeWinds, energy markets for Oil Price Information Service, and general business topics for FactSet Mergerstat and Investor's Business Daily. When he is not stuck in the office, he enjoys tours of ports, terminals, and railyards.