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Why is transportation M&A so hot?

AskWaves: Record earnings bring record cash flows, which need to be put to work

Carriers are looking to make accretive deals (Photo: Jim Allen/FreightWaves)

M&A in the transportation and logistics industry was up in a big way in 2021. Many of the catalysts in place during the year appear likely to continue.

After multiple quarters of record earnings, transportation companies are flush with cash and need a means of deploying it. Other industry participants are merely looking to gain more control of their supply chains, which are severely disrupted after a post-COVID economic rebound met a transportation network ill-equipped for a freight surge.

Add in low interest rates and a market willing to underwrite new share issuances (even at higher valuation multiples), the catalysts for a heightened level of M&A remain in place.

While the book hasn’t closed on 2021, the aggregate value of transportation and logistics deals was up 84% year-over-year for the 12 months ended Nov. 15, according to data from audit and consulting firm PwC. Deal volume is already 11% higher than full-year 2020.

Deal flow in the space has come from transportation providers, shippers and strategic investors alike. The value of logistics deals has increased 105% from full-year 2020 to the period covering the last 12 months.

Many have sought acquisitions aimed at greater supply chain visibility. As e-commerce demand has soared during the pandemic, shippers want to be better positioned to quickly deliver goods to consumers. This requires the forward deployment of inventory closer to the consumer, which requires more warehouse space and investments in technology, including freight management platforms, automation and fulfillment.

“Supply chain dependency and disruption have driven investors to the deal-making table as they seek to navigate generational changes in the sector,” Darach Chapman, transportation and logistics deals leader at PwC, stated in a report.

The PwC data showed deal volume in the transportation industry has largely been driven by the logistics, vehicle rental and trucking sectors.

Strong consumer spending, which has been more concentrated on buying physical goods versus services, has led to an extended period of high freight flows. The trucking industry was already facing capacity constraints due to driver demographic challenges and a steady appetite of increased regulation before the pandemic arrived. Further, the nation’s transportation network as a whole was limited after years of underinvestment in infrastructure.

High demand and limited capacity have pushed freight rates to record levels. Transportation providers have seen margins improve and earnings hit all-time highs. With higher earnings comes higher cash flow.

Companies have a few methods of cash deployment; reinvesting in the business (capital expenditures), share repurchases and dividends, or M&A.

Most well-run transportation providers generate ample cash flow from operations and can easily cover annual maintenance capex through profits, although some companies have also allocated more capex dollars internally of late toward new offerings, terminal/network expansions and technology platforms.

Share repurchases are attractive when valuations don’t fully represent a company’s entire value. That may not be the case across the bulk of the transportation complex, which is trading north of 20 times 2022 earnings (truckload stocks have been the exception with many trading at 12 times). Companies with a dividend program in place have raised payouts given improved cash positions.

While many transportation companies have a balanced approach to cash deployment, several have accelerated M&A or plunged into the deep end for the first time.

Werner Enterprises (NASDAQ: WERN) acquired a regional TL carrier and a final-mile provider recently even though it had never made an acquisition in its 65-year history. The deal provided it a new means of deploying cash but it was also strategic as it onboarded equipment and drivers, both of which are tough to find.

Other carriers have acquired to broaden and deepen their transportation offerings.

Truckload, logistics and intermodal provider Knight-Swift Transportation (NYSE: KNX) added less-than-truckload to its lineup through two acquisitions. And LTL and logistics company ArcBest (NASDAQ: ARCB) doubled the size of its brokerage platform with the addition of another broker.

Shippers have also been active vertically integrating their supply chains.

Ashley Furniture acquired a large chunk of a truckload fleet serving the western U.S. to shore up capacity. That deal followed two transactions from American Eagle Outfitters (NYSE: AEO), the acquisition of a third-party fulfillment provider and a parcel-delivery company.

Looking to 2022, all of the catalysts favorable to deal flow appear poised to continue. Companies are kicking off historic profits and capital is cheap. Carriers will likely continue to build out service offerings as well as onboard equipment, drivers and new customer books through M&A, while shippers will look to fix the kinks throughout their supply chains, some of which won’t be done organically.

Click for more FreightWaves articles by Todd Maiden.

Watch: Is it already time to start thinking about Q1 2022?

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Todd Maiden

Based in Richmond, VA, Todd is the finance editor at FreightWaves. Prior to joining FreightWaves, he covered the TLs, LTLs, railroads and brokers for RBC Capital Markets and BB&T Capital Markets. Todd began his career in banking and finance before moving over to transportation equity research where he provided stock recommendations for publicly traded transportation companies.