Transportation deals: PricewaterhouseCoopers report says 2007 M&A volume on pace to exceed 2006 levels

Jeff Berman, Senior Editor -- Logistics Management, 1/4/2008

PHILADELPHIA—Despite the many twists and turns that continue to affect the transportation and logistics industries—such as a spike in oil prices, security and infrastructure-related issues, and a capacity crunch—one component that appears to have held steady is the amount of transportation and logistics merger and acquisition (M&A) activity, according to a report released last month by PricewaterhouseCoopers.

The quarterly report, entitled “Intersections: Global Transportation and Logistics Transportation Analysis,” makes several interesting points regarding the hectic amount of deal-making that occurred over the first three quarters of 2007, with one of the biggest deals being private equity firm Apollo Management Ltd. (the parent company of CEVA Logistics) acquiring third-party logistics (3PL) services provider EGL for approximately $2 billion.

The most interesting takeaway of this report may be the fact that PWC surmises that while total transportation and logistics deal volume for 2007 is on pace to exceed 2006 levels, the total deal value is not expected to exceed 2006. The report said that total deal value for the first three quarters of 2007 was $39 billion compared to $27 billion for the first three quarters of 2006.

But while this is an unusual occurrence, it is not a sign of things to come, according to Ken Evans, U.S. transportation and logistics sector leader for PricewaterhouseCoopers.

“The economy has been relatively healthy [in 2007] up until very recently, and many modes have seen and are experiencing pretty nice freight rates, especially those focused on bulk shipping,” Evans told LM in an interview last month. “The railroads have been strong and trucking has dipped a bit, but the economy has been [generally] strong and I think the same factors that have driven consolidation within transportation and logistics are really still there.”

Evans also pointed out that the transportation and logistics market is “a highly competitive environment,” and transportation and logistics services providers are looking to grow in critical mass so that they can perform more services and keep up with their customers’ (or shippers’) needs and requests, as they become bigger and more global. This, in turn, is forcing transportation and logistics services providers to get bigger so they can fulfill the needs of larger shippers, noted Evans.

The need to grow, expand service capabilities, and meet the needs of shippers is a major driver of transportation and logistics M&A, explained Tom Connolly, managing director of EVE Partners, an Atlanta-based transportation and logistics banking boutique.

“Everybody is looking for ways to grow and diversify,” said Connolly in an interview. “Trucking guys getting into forwarding, and brokerages and forwarders and brokers are getting into transportation. People are integrating more across their supply chains and want to offer more broad services, and shippers seeking more one-stop services if they can find them so that will continue to help [transportation and logistics services providers] expand through M&A and partnerships.”

The Credit Crunch: While M&A volume was moving at a healthy clip throughout most of 2007, the report noted that it tailed off somewhat late in the third quarter, due in large part to financial investors being influenced to the decline in debt market liquidity i.e. the “credit crunch” as well as stock market volatility.

“The credit market situation constrains the access to capital for financial buyers in the short term until the credit markets come back,” said Connolly. “And that is not a trend; it is more a case of market retrenching and sizing. “There is too much capital on the sidelines in the equity side of the world and at the end of the day lenders are in the business of lending money so they are not going to quit doing it forever. [M&A] activity will pick up in 2008, and it will be a tighter and more disciplined approach and will have some effect on valuations.”

Other notable takeaways of the report focused on how larger acquisition targets are becoming more desirable with the emergence of mega-deals—more than $1 billion—that occurred in 2006 and 2007. And according to deals based on value, PricewaterhouseCoopers said that U.S.-based firms were the leading acquisition targets for M&A deals worth more than $50 million in 2006 and the first three quarters of 2007.