TJC will pay cash for the outstanding shares of Echo at a price of $48.25, a 54% premium to Thursday’s closing price and 32% higher than the stock’s all-time high recorded in September 2018.
Over the last three months, Echo’s (NASDAQ: ECHO) shares traded in a range of $27 to $33 per share, which valued its forward-looking adjusted earnings in a range of 11x to 14x. That compares to brokers C.H. Robinson (NASDAQ: CHRW) and Landstar System (NASDAQ: LSTR), which traded at multiples of 17x to 20x over the same period, even though Echo beat earnings expectations by more than 30% over the last four quarters.
The acquisition brings Echo’s current valuation to 20x 2022 earnings and in line with those companies.
The deal values the Chicago-based broker at more than 11x earnings before interest, taxes, depreciation and amortization (12x enterprise value-to-EBITDA) versus the 7x multiple the company was trading at previously.
C.H. Robinson and Landstar trade at an EV/EBITDA multiple of roughly 13x 2022 estimates.
|Acquisition price||$1.3 billion|
|Target revenue run rate||$3.2 billion LTM|
|Transportation & logistics acquisitions by acquirer||AIT Worldwide Logistics, Capstone, Odyssey and TransImpact|
Valuation too low for too long
Echo’s valuation was too low for a company with 0.5x net debt to adjusted EBITDA, a non-asset model (except for technology) requiring minimal capex and a platform generating roughly $40 million to $60 million in free cash flow annually.
Management even contemplated pursuing its share repurchase plan more vigorously given the low share price during its second-quarter call with analysts.
“We did unlock shareholder value that we believe has always been there but we didn’t get credit for,” Doug Waggoner, chairman and CEO, told FreightWaves in an interview.
The value of the transaction lags some of the loftier deals recently announced like Uber Freight’s (NYSE: UBER) acquisition of Transplace for more than 20x EBITDA. Uber Freight has been reported to have a $3.5 billion price tag even though the unit has yet to break even on an adjusted EBITDA basis and only generates annual gross bookings of $1.25 billion, half the gross revenue recorded by Echo in 2020.
On the huge divide between the valuations for startups and publicly traded companies with a long track record, Waggoner said, “They’re paying for what could be and Jordan’s paying for what is.”
M&A likely to ramp much higher
In addition to the immediate value creation the transaction brings, Waggoner said being a portfolio company of TJC will provide it with transportation experience and connections as well as deeper pockets to make acquisitions.
Since its 2005 start, Echo has completed 21 acquisitions, mostly smaller tuck-in deals, but larger ones as well, like the $420 million acquisition of Command Transportation in 2015.
“I think if anything we’ll be more active,” Waggoner said.
“It was getting to be tough to finance bigger deals as a public company just because of the limitations that we have with debt leverage, the relative valuations, ours versus what some of these companies were going for in the hands of private equity. I think we’re going to be on a more competitive footing now to be able to go out and do meaningful M&A,” he continued.
No operational changes are planned for Echo. The executive management team will remain in place and it will be “business as usual” for its more than 2,500 employees and 30-plus locations.
“It will be the same strategy that we’ve had. But in the private environment versus the public we can be a little more focused on making short-term decisions that are directly tied to our long-term strategic objectives,” Waggoner added. “In a public company, you have to more or less live quarter to quarter and be conscious of the optics on that quarter’s release.”
The transaction was unanimously approved by Echo’s board and will be subject to customary closing conditions as well as a vote by shareholders. The deal is expected to close in the fourth quarter.
Morgan Stanley (NYSE: MS) is serving as exclusive financial adviser to Echo.
TJC is listed with more than $17 billion in capital commitments, focusing on investments in multiple sectors, including transportation and logistics. The firm’s portfolio includes AIT Worldwide Logistics, Capstone and Odyssey. TJC briefly owned GlobalTranz as well.
“We strongly support the team’s vision for continued growth and look forward to partnering with them as we bring expanded financial resources and expertise to accelerate Echo’s technology leadership that has set the company apart from its competitors,” stated Brian Higgins, TJC’s logistics and supply chain head, in the press release.
Waggoner concluded, “I feel happy that we got recognized with the valuation that we deserve and that our shareholders deserve. I think there is nothing but upside because if I look out at the competitive landscape, there’s nobody that I’m afraid of. We can continue to shine above the others and the credit for that will continue to come in.”