Transportation deals: PricewaterhouseCoopers report says 2008 deal activity is back on track

Second quarter deal value uptick seen as a driver for growth, but U.S market is still challenging due to economic conditions

Jeff Berman, Group News Editor -- Logistics Management, 8/6/2008

NEW YORK —Even through economic and market conditions have crimped various transportation and logistics operations to a certain degree over the past several months, the amount of transportation and logistics merger & acquisition (M&A) activity appears to be holding steady, according to a report from PricewaterhouseCoopers (PWC).

The quarterly report, entitled “Intersections: Global Transportation & Logistics Mergers and Acquisition Analysis,” notes that transportation and logistics M&A deal value for the first half of 2008 is expected to exceed 2007’s totals, although deal volume lags behind. This represents a shift from PWC’s May Intersections report, which indicated that 2008 would not likely match 2007’s level of deal making.

Over the first half of 2008, PWC said there were 84 deals worth $50 million or more, which would fall short of the 190 deals at the same level that occurred in 2007. But deals in which a United States-based entity—whether it is an acquirer and/or target are excluded—the first half total is 68, which would be on par with 2007’s 137 deals and top 2006’s 119 deals. In terms of deal value, the report said there were 52 deals worth $50 million or more in the first half, which puts it on pace to top 2007’s 80 but fall short of 2006’s 161. But when U.S. entities are excluded that total is 33, which is on pace to pass 2007’s 52 non-U.S. deals.

Average deal value for the first half of the year—for deals at $50 million or more—was $625 million, which surpasses 2007’s $423 million. This is driven in part to 11 deals valued at $1 billion or more during the first half, including Delta Air Lines potential acquisition of Northwest Airlines and a $12.8 billion binding bid submitted for a 75-year lease of the Pennsylvania Turnpike by Citi Infrastructure Investors and Albertis Infraestructuras of Barcelona, Spain and Criteria CaixaCorp. This current pace puts deals of this size to exceed 2007’s 16 and 2006’s 20 deals valued at $50 million or more.

Another trend cited in the report, which was similar to the first quarter’s findings, was that there were a lower number of deals—worth $50 million or more—in the first half of the year by financial investors (28) than strategic investors (56). In 2007, there were 114 deals made by strategic investors and 76 made by financial investors.

Deals cited in “Intersections” represent all announced deals for the first half of 2008—as opposed to completed deals—and do not parse out deals that were withdrawn, intended, or pending.

PricewaterhouseCoopers U.S. transportation and logistics sector leader Ken Evans told LM in an interview that even though U.S.-based deals are down to a certain extent compared to past years, interest in U.S. entities appears to be picking up. What’s more, the report notes that of the 11 deals valued at $1 billion or more, three of them involve a U.S-based acquirer and/or target—the Pennsylvania Turnpike; Northwest-Delta; and UK-based Global Ship Lease Inc.’s pending acquisition of Marathon Acquisition Corp.

“From the U.S. perspective, there was more interest in the second quarter,” said Evans. “And the way the credit crisis impacted the market seemed to drag into this year as we watched the dollar decline against most currencies, we began wondering if activity from overseas had increased in interest for lower-priced assets…but at least in the first quarter we did not see that happening. But at the same time interest in U.S. entities picked up, and it will be interesting to see if that continues if the U.S. credit markets stabilize.”

But even though there is potential for U.S. companies to get back in the game, it is still pulling total deal activity down from a volume standpoint, noted Doug Turner, president of Toronto-based Obsidian Transportation and Logistics Consulting.

“In the U.S., the economic slowdown and the fuel cost issue are adversely affecting margins and causing a significant increase in bankruptcies within the industry – bankruptcies are up three fold,” said Turner. “This would cause a buyers market, but the tight credit situation and economic uncertainty are holding buyers back. The adverse U.S. dollar effects are shrinking US appetite for foreign acquisitions. Elsewhere, the recessionary effects of the U.S. economy haven’t been felt nearly as strongly as in the past (at least until the last few weeks) and the pace of acquisition activity has been fairly buoyant.”

As has been the case in previous editions of “Intersections,” this current edition highlights the fact that the deal values and volume totals tend to look better when U.S.-based entities are excluded from the totals. Turner explained that this is due to things like the economic slowdown and fuel cost issues that are adversely affecting margins, as well as causing a significant increase in bankruptcies within the trucking industry. He pointed to trucking bankruptcies being up three fold with some high profile names such as Jevic Transportation and Jim Palmer Trucking closing their doors in recent months. Another issue he cites is that profit margins have evaporated in air cargo and express integrators are reporting declining margins.

“This would normally [spur] a buyers market, but the tight credit situation and economic uncertainty are holding U.S. buyers back,” said Turner.

Going forward, Turner said that further consolidation and removal of capacity will help in the short term, but in the long term, what needs to happen is to get the U.S. economy turned around, the cost of fuel stabilized at a reasonable level, and the US budgetary deficits back in line, which he said will have a positive effect on the prospects for U.S. economy and the U.S. dollar.