Even if the freight industry has entered the downturn of the cycle, M&A activity in the supply chain is still strong. Transportation businesses now have the chance to use acquisitions to address capacity, personnel, and other supply bottlenecks after several quarters of record earnings and cash flow production. To lessen cyclicality, providers are also continuing to diversify their product lines.
Peter Stefanovich, president of Left Lane Associates, told Freight Waves, “We’ve never really been busier — ever.” Thanks to the industry and its resilience, the multiples and value of what individuals are seeking from an acquisition perspective are remaining constant, not decreasing, “despite the macroeconomic challenges that are going on.”
A Toronto-based M&A company called Left Lane specializes in supply chain and transportation-related investments.
Plugging holes with M&A
According to a PwC midyear analysis, the value of transactions in the transportation and logistics sector during the previous 12 months increased 6% when compared to full-year 2021, while the number of agreements decreased 7% during the same period. Deal value increased for trucking, passenger air, and shipping but decreased for logistics, even though it was twice as high as it had been before the outbreak.
Since nearly two-thirds of the transactions made by his company are kept under wraps for competitive reasons, Stefanovich claimed that public deal counts can be deceptive. According to him, valuation multiples are now ranging between 20% and 75% greater than they were before the pandemic. Specialist suppliers and difficult-to-replicate assets like convertible and less-than-truckload are reflected in the highest end of the range.
According to Stefanovich, the reason why rates and multiples aren’t falling is that there aren’t enough power units, trailers, and other pieces of transportation-related equipment. Companies lack the physical resources needed to move products.
The premium prices paid for equipment are unlikely to considerably decrease in the upcoming quarters since heavy-truck OEMs are anticipated to find it difficult to keep up with demand. Fleets with substantial financial resources, however, are leveraging M&A to get around supply limitations. Many businesses continue to buy up rivals, noting that the appeal lies not simply in acquiring another carrier and its customers, but also in having access to equipment, terminals, and drivers right away.
Recently, TFI International-owned Contract Freighters Inc.’s refrigerated and over-the-road fleets were purchased by Heartland Express (NASDAQ: HTLD) (NYSE: TFII). Heartland received 2,100 tractors, 8,000 trailers, and six terminals as part of the $525 million acquisition. On a conference call with investors to announce the sale, Heartland CFO Chris Strain said, “CFI, what they contribute in this transaction is some open trucks. “We have alternatives to fill certain seats when we can’t get our hands on any trucks.”
The acquisition was Heartland’s second of the year. It revealed in June that it had spent $170 million for the 850-tractor fleet and dry van carrier Smith Transport.
Fleets have been forced to prolong trade cycles because the industry’s equipment order book continues to be oversold. Multiple COVID-related shutdowns during the pandemic pushed back production schedules, and the company is still dealing with parts shortages brought on by supply chain and manufacturing delays in other countries. These factors collectively keep equipment prices high.
According to Stefanovich, the cost and accessibility of equipment strongly influence M&A in the transportation industry. I don’t believe there will be a significant downward adjustment on [deal] multiples until sometime in 2024, perhaps in the latter half of 2024 or beyond, because those two factors go hand in hand.
Shopping for assets in different modes
They are trying to spread out the various peaks and valleys they observe in the industry by concentrating on various verticals. Additionally, it enables them to cross-sell and cross-pollinate widely, according to Stefanovich.
The playbook of several carriers is being expanded to encompass everything unrelated to conventional one-way TL. More than in previous cycles, dedicated, intermodal, brokerage, and asset-light offerings now make up a higher portion of carrier income.
The biggest carrier in the country has also expanded. In the second quarter, TL revenues from Knight-Swift Transportation (NYSE: KNX) accounted for just 57% of total revenue. The company recently increased the size of its intermodal (14% of revenue), logistics (8% of revenue), support services for third-party carriers (8% of revenue), and two LTL carriers (13% of revenue) in addition to growing its logistics and intermodal operations.
The fundamental argument of the diversified approach is that it will reduce the peaks and troughs of the asset-based TL cycle.
Buyers coming from far and wide
Domestic transportation assets are interesting to many overseas bidders. There have been several big foreign purchases of American assets recently.
In August, Canada Cartage and its 4,000 tractors were purchased by the state-owned investment company Mubadala Capital of the United Arab Emirates for an unknown sum. In June, TL carrier USA Truck (NASDAQ: USAK) and German logistics company DB Schenker announced a $435 million acquisition deal. The agreement will give the international freight forwarder exclusive control over trucking assets in the United States.
A.P. Moller – Maersk, a Danish shipping firm (MAERB.C.EB), said in February that it had agreed to pay $1.8 billion to acquire the American freight forwarder Pilot Freight Services. Many U.S. assets were previously purchased by Maersk, including the e-commerce fulfillment firm Visible SCM in 2020 and the warehouse and distribution company Performance Team in 2020. There are now about 150 sites operated by Maersk in the United States.
There are rumors that the Danish freight forwarder DSV (DSV.C.DX) is interested in the assets of the American freight broker C.H. Robinson (NASDAQ: CHRW).
According to Stefanovich, he is also receiving queries from businesses looking to vertically integrate. Recently, some heavy industrial operators have expressed interest in purchasing a fleet to get around potential truck capacity issues.
Never previously has the North American supply chain market attracted as much interest, according to Stefanovich. He thinks that as supply chains try to bypass China and ocean transportation, nearshoring will continue, ultimately encouraging more investment throughout the continent.
Private equity, family offices, venture capital, public and private strategic investors, as well as high-net-worth individuals, are among the buyers, according to him. According to Stefanovich, they are all interested in owning domestic transportation and logistics assets.
According to PwC, private equity companies have $2.3 trillion in the capital that needs to be invested, a 3x growth over the last 15 years. Five years ago, only one-third of all deal flow came from this investor segment today. The growth has been caused by the urge to surpass benchmarks and seek returns. However, as inflation and interest rates rise, the task becomes increasingly challenging.
Over the past two years, they have made a tonne of money, according to huge Stefanovich. They still have a sizable amount of dry powder to use. From a macroeconomic perspective, when there is uncertainty is when they should buy enterprises.
According to Stefanovich, there are still a lot of buyers out there. Following deregulation in 1980, a lot of operators entered the trucking industry and don’t have a succession plan. Time’s father has arrived. We have to exit eventually. So why not do it now rather than waiting for another pandemic, housing crisis, or calamity?
Considering that valuations and takeout multiples are unlikely to decrease any time soon, he thinks that those who wait to acquire will lose out.
Other parties are seated there and saying, “Well, we’re about to jump in because we’re not going to miss this,” he added.