Trucking merger and acquisition activity starts to heat up

Analyst says increased pace of potential deals is a positive for the sector

By John D. Schulz · October 15, 2013

Don’t look now, but there has been an explosion in merger and acquisition activity in the trucking industry in the fourth quarter. The fleets that shippers are using today might not be the names of the fleets hauling freight tomorrow.

The largest potential merger would be Phoenix-based Knight Transportation’s proposed $242 million takeover, including debt assumption, of financially ailing USA Truck. That initial overture was rejected by USA, although Knight is hinting it may proceed with a hostile takeover of the Van Buren, Ark.-based TL carrier.
 
But just in the first few days of the fourth quarter, there were these other trucking M&A developments:
-Toronto-based Vitran Corp. agreed to see its money-losing U.S. LTL operations to U.S. LTL entrepreneur Matthew Moroun for $2 million, plus debt assumption;
-Separately, TransForce is in talks to buy Vitran’s profitable Canadian LTL operations for $74 million;
-Jack Cooper Transport Co., the largest U.S. auto hauler, was given approval by a U.S. bankruptcy judge to buy Allied Systems Holdings, which used to be the largest U.S. auto hauler, for $135 million; and
-Phoenix-based third-party logistics provider Radiant Logistics bought On Time Express Inc., a time-critical domestic and international logistics company, for $20 million.
 
Of course, these deals occurred in the wake of the failed talks between YRC Worldwide, the nation’s second-largest LTL carrier, and ABF Freight System, the sixth-largest LTL carrier, last summer. There are rumblings those talks may not be completely dead and that parts of YRC’s regional operation might still be on the market.
 
David Ross, trucking analyst for Stifel Nicolaus, told LM that he views the increased pace of mergers and acquisitions in trucking as a positive sign for the highly fragmented trucking industry.
 
“Some companies have cash and/or borrowing availability on their balance sheet and are looking for growth that is not available organically in a lackluster freight market,” Ross explained. “So if they can find a company at a reasonable valuation, M&A makes sense for some.”
 
Ross said he believed industry consolidation should continue through M&A and carrier failures over the next year or so, although that might mean higher rates for shippers.  “If trucking companies want to grow, it helps the pricing environment if they do so by buying existing capacity rather than by adding new trucks to their fleet,” said Ross.
 
Knight, one of the top and most profitable truckload companies, says it was “disappointed” that USA Truck has rejected Knight’s $9 per share, all-cash offer. That offer was for $95 million in equity, plus assumption of $147 million in USA Truck debt, making the total enterprise value of the failed bid $242 million. That would be one of the largest rejections of a purchase of a publicly held truckload carrier since the Great Recession began in 2008.

The Knight-USA combination would have been the largest TL acquisition since Con-way Inc. bought Contract Freighters Inc. for $750 million in 2007.
 
But there are indications that Knight might not be done in its pursuit of USA Truck, and is preparing a hostile takeover.
 
Knight added that since making its proposal public, it held discussions with “several” of USA Truck’s largest shareholders that have indicated their support for its proposal. Knight said based on those conversations, it took the necessary steps to acquire USA Truck.
 
“We continue to believe that a combination of Knight and USA Truck is better positioned to deliver value for and is in the best interest of all of Knight and USA Truck’s stakeholders, and we are prepared to take the necessary steps to make this combination a reality,” Knight said in its statement.
   
Benjamin Hartford, an analyst with Baird Research, called the upside potential for a Knight-USA Truck merger “significant.” He said in a note to investors that it was indicative of industry consolidation and firming freight volume growth that could help pricing power for fleets and be an “important catalyst” for the entire TL sector, which has struggled with rate increases in the past year or so.
 
Rapidly growing Knight Transportation ranks as the nation’s sixth-largest TL carrier, solidly profitable with revenue growth of 8.1 percent last year to $936 million. It is expected to exceed $1 billion in revenue this year, joining Schneider, Swift, U.S. Xpress, Werner Enterprises and Landstar in the $1 billion TL club.
 
USA is large, but not profitable. It ranked as the nation’s 29th largest TL carrier with a revenue decline of 7.4 percent last year to $297.6 million, from $321.3 million in 2012. It operates about 2,100 power units.
 
Knight, which has consistently posted operating ratios in the low to mid-80s, has an operating philosophy of buying smaller TL carriers as a “tuck-in” acquisition theory. It basically does this on a regional basis, acquiring key customers and quality drivers in the process to help it build freight density in east-west traffic lanes.

Knight already owns approximately 11.3 percent of USA Truck’s shares outstanding, according to a Sept. 26 Securities and Exchange Commission filing. The $9 per share cash offer represented what Knight called “a significant premium” of approximately 39 percent to USA Truck’s closing price on Sept. 25, the last trading day before its offer was made public.
 
USA Truck said that it is still open to all strategic options. It said it was open to further talks with Knight Transportation. But USA added that it still feels that moving forward as a stand-alone company with its strategic plan is the best way to provide value to its shareholders.


About the Author

John D. Schulz
John D. Schulz has been a transportation journalist for more than 20 years, specializing in the trucking industry. John is on a first-name basis with scores of top-level trucking executives who are able to give shippers their latest insights on the industry on a regular basis.

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