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Why transportation M&A could step higher in 2022

Insiders weigh in with their predictions for the new year

The need for trucks and drivers is being solved through M&A. (Photo: Jim Allen/FreightWaves)

Acquisitions throughout the supply chain complex were plentiful in 2021. Record freight rates and margins drove earnings to new highs for transportation providers, creating a potential high point for sellers to exit and an abundance of free cash flow for buyers to deploy.

Carriers used M&A to add hard-to-find equipment and drivers to their networks and some were able to bolt on complementary offerings in adjacent modes. Shippers with large supply chains focused on regaining control after several quarters of dealing with congestion and bottlenecks. Those actions included FreightTech additions with a few acquiring their own transportation fleets.

The year was strong from start to finish. Transportation and logistics deal value was up 84% for the 12-month period ended mid-November (latest update) compared to full-year 2020. Higher valuation multiples were the big driver as deal volume was up just 11%, according to a report from consulting firm PwC.

2022 may be a busier year

The appetite for M&A in the space appears likely to continue as an abundance of supply chain headaches will continue to be worked through inorganically. 

Capital is still easy to access. Equity markets continue to absorb share issuances and lenders haven’t altered risk assumptions. A couple of planned interest rate hikes during the year will likely only present a slight hindrance if any at all.

“There’s still going to be supply chain constraints that are going on and that’s still driving a strong M&A market,” Peter Stefanovich, president at Left Lane Associates, told FreightWaves in an interview. Left Lane is a M&A firm based in Toronto solely focused on transportation and supply chain companies.

He expects the M&A boom in transportation and logistics to carry into 2023 with some slowing in activity as supply chain headwinds ease.

“It’s not going back to pre-pandemic, there are too many issues going on with the supply chain. You can’t rectify them that quickly,” Stefanovich said. “Purchasers are looking to buy companies in order to alleviate their bottlenecks.”

He thinks deal flow in 2022 will be as high or higher year-over-year as delayed production backlogs at the truck original equipment manufacturers will keep carriers active buying other fleets in efforts to solve for capacity.

“Our pipeline for ’22, both on the buy and sell side, is more full now than it has been in any year prior,” Billy Hart, managing partner at Bluejay Advisors, told FreightWaves. Bluejay is a transaction and capital advisory firm entirely focused on the transportation and logistics space. The firm recently advised dedicated truckload carrier Midwest Logistics Systems in its sale to Schneider (NYSE: SNDR).

Difficulties finding drivers and equipment are pushing some fleets to M&A. 

“[Carriers] are making acquisitions based upon capacity,” Hart continued. “Part of the thesis in acquiring these companies — not only from the revenue, the EBITDA and the net income perspective — it’s a pure capacity play as well. I don’t foresee that going away at all in 2022.”

He said financial buyers (private equity, fund managers, etc.) that have traditionally shied away from transportation and logistics assets are very active, bidding up deals in some cases. “You get a lot of activity, you also get pretty good tailwinds on the valuations because they have to deploy the capital.”

Hart said valuations have moved roughly 30% to 35% higher since early 2018, the last freight upcycle. There was a pause in values early on during COVID. But pent-up investment dollars began to flood the space after the economy came back online, with even distressed sales getting well above asset value in some instances, according to Hart. The cleaner deals, in which the assets/companies don’t have systemic issues, are fetching prices more than 40% higher than early 2018.

Stefanovich said multiples are up roughly 10% to 30% from shortly before the pandemic began.

“There’s going to be strong demand for vertical integration from suppliers, manufacturers to buy their own fleets so they have their own dedicated fleet,” Stefanovich said. “They want to control their own destiny.”

He sees more deals involving shippers in 2022, noting Ashley Furniture’s acquisition of a TL fleet and American Eagle Outfitters (NYSE: AEO) picking up a third-party fulfillment provider and a parcel-delivery company last year.

He also expects transportation and logistics technology to be on the shopping list this year as well.

“It’s being able to integrate various systems on different platforms and make things seamless, so that way you can find cost synergies,” Stefanovich added. “Having a good TMS or WMS or driver recruitment software is key for the future of supply chains.”

As far as ranking expected M&A deal volume throughout the industry in 2022, Stefanovich expects the less-than-truckload industry to remain “very, very hot,” followed by warehousing and the non-asset providers.

When asked which areas of transportation and logistics — asset-based, asset-light, brokers, 3PLs, FreightTech, warehouses, etc. — will be in high demand in 2022, Hart said, “Yes.”

Is now the time to exit?

Record earnings and cash flow, high valuation multiples and well-capitalized buyers needing to plug holes in their networks have created a seller’s market. But is now the right time to leave?

Stefanovich thinks so, noting uncertainty around cost inflation, driver issues, higher interest rates and other headwinds.

Carriers have been absorbing higher costs for a couple of years now. Prior to COVID, rising insurance costs were the main expense headwind as insurers looked to mitigate risk and minimize exposure to nuclear jury verdicts. The pandemic and subsequent freight boom has brought on multiple rounds of driver pay increases and mid-single-digit cost inflation up and down the carrier’s P&L.

Diesel prices are up more than 40% year-over-year on average since early summer. While carriers have surcharges in place to navigate the fluctuations, higher fuel prices will present a headwind in rate negotiations when the freight market cools. Higher interest rates will push leasing expenses up and the investment dollars required to provide reliably high service in a tech-enabled transportation industry are growing.

Also, capex has been delayed as the OEMs have struggled with parts shortages and production issues, meaning additional investment will be required by carriers over the coming years to return equipment ages to historical averages.

All of the cost headwinds, some of which are really just beginning, will likely run through the downside of the freight cycle, making an exit (on a high) attractive. 

“You need to invest a ton of capital and stick around for the next five to 10 years to see those investments realized or you can just get out,” Stefanovich said. “That’s the decision a seller is looking at right now.”

Hart provided a counterargument for staying. He said many of his clients are aware of the cost headwinds but have been successful offsetting inflation through rate increases. They also know the longer-term view for truck capacity favors the carrier. 

“Most recognize that it’s not always going to be like this,” Hart said, referring to the extended cycle. The real question for clients is: “How long can I run this because my business is cash-flowing like it’s never cash-flowed before. I have great growth opportunities. Do I continue to fuel the growth engine and increase my bottom line by 25% over the next 12 months and then think about an exit?”

He said that many are trying to make the determination on whether or not today’s work and incremental investment will be rewarded when they finally do exit. Hart added, “It’s a great time. The market’s hot, but is the market going to get so soft that my 25% growth will get wiped out?”

Hart said many of his clients are still “having a blast,” with many of them pondering: “I’ve been in this business for 20-some-odd years and I’m killing it. Do I really want to sell it off now? What am I going to do next?” 

He’s advising clients who are planning to exit in the next three years, and as far out as five years, to seriously consider going out now. But those who have longer timelines should stay because the supply-demand dynamics are strong.

“This industry is absolutely required. It weathers economic disruption quite well, Hart asserted. “This is a good, stable, growing environment to put your money in. I’m bullish for the long term.”

The FREIGHTWAVES TOP 500 For-Hire Carriers list includes Schneider (No. 7).

Click for more FreightWaves articles by Todd Maiden.

Watch: Will 2021 inflationary pressures hold in 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.