Logistics M&A: Transportation and logistics deal making outlook is solid, says PwC

The ongoing rebound in that transportation and logistics merger & acquisition activity appears to continue to be gaining traction, according to PricewaterhouseCoopers (PwC).

The firm’s quarterly report, “Intersections: First Quarter 2011 global transportation and logistics industry mergers and acquisitions analysis,” indicated that first quarter deal value came in at $8.2 billion compared to $17.3 billion a year ago. But PwC noted that this drop-off is largely due to “a lack of mega deals,” with a disclosed value of at least $1 billion, adding that 2011 is on a similar growth path to 2010 for deal volume.

The number of deals worth $50 million or more reported by PwC in the first quarter of 2011 at 37 was flat compared to 2010’s 36, and the total deal value was 31.7 percent higher in the first quarter of 2011 at $8.2 billion compared to $5.6 billion in 2010. Of those 37 deals, only three involved U.S.-based targets and/or acquirers.

Average deal value for deals $50 million or more came in at $200 million. This is down from $500 million in the first quarter of 2010 and $800 million in the fourth quarter of 2010, and PwC said that this trend is likely to reverse with the continuing improvement in freight and passenger volumes which should drive valuation trends going forward.

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all announced deals for the quarter-as opposed to completed deals only-and the report does not parse out deals that are withdrawn, intended, or pending.

“If you look at the trends in this report compared to previous years and quarters, you are seeing an upward trend in M&A deal activity, and we did not see as many major deals this quarter, in terms of deal value, compared to prior quarters,” said Ken Evans, PwC U.S. Transportation and Logistics Sector Leader, in an interview. “But we did see a stimulation of some pretty strong trends in the number and volume of deals that were made, and we feel healthy about M&A in a slowly-recovering economy combined with some very healthy companies that have really focused on their balance sheets and are now cautiously—but positively—looking to expand on the strategic side…and we see those folks in the market continuing to push forward.”

Evans added that it looks like a strong deal-making environment for the rest of the year, with strong momentum.

PwC Transportation Analyst Michael Portnoy said that historically the number of deals has been a more consistent indicator of the market, whereas on a quarter-to-quarter basis there tends to be more variation in the value of deals, due to the presence or lack of a very big deal occurring.

Two areas which appear to be picking up steam on the deal making front are shipping and logistics and transportation infrastructure, according to PwC.

Shipping and logistics accounted for 70 percent of total quarterly deal value and four of the five largest deals announced in the first quarter, including the pending acquisition of K-Sea Transportation Partners LP by Kirby Corp. for $570 million. PwC said that interest in these sectors may continue as concerns regarding overcapacity decline in conjunction with improving demand.

“A growing and improving world economy, where freight is moving again especially on the global side, and demand dictating capacity and pricing for companies moving freight is a very positive thing,” said Evans. “We are also in a period where very large airline passenger deals happened prior to this quarter; we are now in a period where those deals are being absorbed and integrated.”

Regarding transportation infrastructure, Evans and Portnoy concurred that strong financial returns and the ability to use privatization to address fiscal pressures are drivers for continued growth in that sector.

“The conditions are in place for a significant amount of activity in that space,” said Evans. “Places like Europe have come to embrace private infrastructure ownership with public benefits. The model is successful and proven and with the fiscal issues surrounding the U.S. government….the conditions are set to move to these deals more through leasing and ownership of projects that were once public activities now being managed by the private sector. Investors want long-term steady returns and if they can see 6-to-8 percent returns over a long period of time, they will take that and also lessen costs for the government.”

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 2011.”

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.