PwC report points to increased transportation and logistics M&A activity

Continuing a trend that showed signs of increasing traction during the second half of 2010, there are signs that transportation and logistics merger & acquisition activity is continuing to rebound, according to PricewaterhouseCoopers (PwC).

PwC’s quarterly report, “Intersections: Fourth Quarter 2010 global transportation and logistics industry mergers and acquisitions analysis,” stated that fourth quarter deal value increased 111 percent to $35.6 billion in the fourth quarter compared to the third quarter’s $16.9 billion. This output dwarfs the second quarter and first quarter of 2010 at $13.1 billion and $15.9 billion, respectively. And total deal value volume and average deal value in the fourth quarter all exceeded the previous three quarters, said PwC.

PwC said there were 42 announced fourth quarter deals worth $50 million or more, with 37 of these deals excluding deals with U.S. targets and/or acquirers and five with U.S. targets and acquirers. Average deal value for deals $50 million or more came in at $848 million.

Deals cited by PwC in the Intersections report represent all announced deals for the quarter-as opposed to completed deals only-and the report does not parse out deals that are withdrawn, intended, or pending.

“The third quarter pause in deal activity was not a dramatic slowdown, but it was a pause that had many of us scratching our heads about what was happening,” said Ken Evans, PwC U.S. Transportation and Logistics Sector Leader, in an interview. “There was a lot of talk in the summer and into the fall about the potential for a double-dip recession [and other things], but we were encouraged by activity in the fourth quarter which is where we thought the whole year was going to be all along, as companies—and financial buyers—have gradually gained more confidence in the economy and are more willing to spend and borrow money, which is more available.”

While there were a higher number of deals in the fourth quarter at 42 compared to the fourth quarter of 2009 at 34, total 2009 fourth quarter deal value was higher at $53 billion, due in large to the $36 billion acquisition of BNSF Railway by Berkshire Hathaway, but when that transaction is excluded, the total and average value of deals in the fourth quarter of 2010 represent the highest quarterly figures over the last three years, said PwC.

As deal value and volumes gained steam in the fourth quarter, PwC explained that much of this activity was driven by passenger deals as opposed to freight and logistics deals. But that should not be misinterpreted as freight and logistics deals not occurring. Instead, it speaks to the fact that they are more often than not below the $50 million level PwC uses as a barometer for deal activity.

Evans explained that the high dollar value associated with passenger deals is related to the continued consolidation of airlines and trying to right-size airline industry capacity, as the number of flights was lower during the recession.

“If I had to speculate, the freight and logistics side is currently lagging behind passenger-related deals, but it may not be for long,” said Evans. “Reasons for this include strong balance sheets, healthy companies, GDP growth, and consolidation on the price side in the next few quarters.”

In terms of who is spending money to make deals go down, the report explained that financial investors are making a return after being on the sidelines for an extended period, which PwC said is a by-product of healthier capital markets and improved credit markets and an increase in leveraged buyout activity, as well as an improving economy and global freight flows.

With deal making in the transportation and logistics sectors continuing to pick up, it reflects how the markets continue to improve, with the quantity and quality of deals improving, too, said Tom Connolly, managing director of EVE Partners, an Atlanta-based transportation and logistics M&A firm.

“Companies are healthier with healthier balance sheets, and financial buyers are making a return to the market,” he said. “These companies are also getting healthier and more stable as well, which is creating a much better deal market and could lead to an improvement in the first quarter of 2011 over the previous quarter.”

Connolly added that it stands to reason that to so-called mega deal market will continue to improve, but the middle market, where the majority of transactions take place, is very active right now.

When asked why there appears to be a wide disparity in passenger and freight transportation deals, Connolly, like PwC’s Evans, explained how passenger deals are part of a consolidated industry and the deals that do take place are going to be large. But on the freight and logistics side, it is much more fragmented, with fewer mega deals but it is a larger sector with a solid amount of deal making activity.

“It is a vibrant market on the freight and logistics side right now,” said Connolly. “With the amount of people out there looking for opportunities and talking, it is really a numbers game, which should lead to good results a few quarters from now for those markets.”