Mergers, acquisitions running at fast pace in booming trucking market

The current spate of trucking mergers and acquisitions will continue as long as low interest rates, the driver shortage, and favorable economic conditions for carriers remain, top industry experts say.

The summer headlines in the transport press on notable trucking M&A activity have been impossible to ignore.

To wit:

• Uber Freight is acquiring third-party logistics planning company Transplace, a deal valued at $2.25 billion. Transplace CEO Frank McGuigan said the deal would give shippers “greater efficiency and transparency, “as well as improving carriers’ operating ratios. “All in all, we expect to significantly reduce shipper and carrier empty miles to the benefit of highway and road infrastructures and the environment,” he added; 
• Knight-Swift, the nation’s largest truckload carrier, bought less-than-truckload (LTL) carrier AAA Cooper for $1.35 billion. Knight-Swift CEO Dave Jackson said the acquisition fulfilled “a long interest” to enter the LTL space. “I couldn’t be happier to finally find the right time for both of us to create a partnership,” Jackson added;
• Werner Enterprises, the nation’s seventh-largest truckload carrier with more than $2.4 billion revenue last year, is acquiring 80% of rival TL carrier ECM Transport Group to expand its presence in the strategic Mid-Atlantic, Ohio and Northeast regions. The acquisition boosts Omaha, Neb.-based Werner’s fleet by more than 6% as well as increasing coverage for regional short-haul freight in these geographic markets. ECM operates nearly 500 trucks and 2,000 trailers in a network of eight terminals; and
• PS Holdco, parent of PS Logistics, purchased all substantial transportation assets of Patriot Transit and Patriot Logistics, a privately owned interstate trucking and logistics provider that specializes in flatbed shipping io the Gulf Coast and in the Southwest. Patriot, founded by David Spencer and Rex Ready, is based in Houston and operates a fleet of 75 experienced driversThose outright mergers and acquisitions follow the move by XPO, the nation’s second-largest LTL carrier, to spin off its contract logistics division. That allows XPO to concentrate on its premier position in the $46 billion-a-year LTL space. Matt Fassler, XPO chief strategy officer, simply noted, "The pricing environment is very healthy.”

This action follows Montreal-based TFI International’s $800 million acquisition of the former LTL unit of United Parcel Service, which bought Overnite Corp. for $1.3 billion in 2005.

Rebranded as “TForce Freight,” the LTL operator posted an operating ratio of just over 90 in the first quarter—dramatic improvement for a company posting ORs of around 99 prior to the sale. Parent company TFI said second-quarter net income soared 398% to $251.1 million compared with $50.5 million in the 2020 second quarter.

The Canadian company began paring “low-hanging fruit” of the LTL carrier’s unprofitable freight and shippers, according to its CEO Alain Bedard.

“We’ve just scratched the surface,” Bedard told financial analysts in a recent conference call. 

Cowen trucking analyst Jason Seidl called the TForce’s  results “well ahead of expectations.”

So what’s driving this current M&A craze in trucking?

Trucking executive, experts and financial analysts say it’s a combination of nearly record-low interest rates, technology applications and perhaps the strongest freight market for carriers in a generation.

Another driving force is the inability of carriers to expand organically because it is nearly impossible to add qualified drivers. An acquisition is the quickest way to expand a fleet without the cost of buying additional trucks and finding qualified drivers.

Donald Broughton, principal and managing partner of Broughton Capital LLC, which closely tracks the trucking industry, chalked up the increased M&A activity to low interest rates, which makes debt inexpensive.

“Technology allows for improvements in economies of scale,” Broughton told LM. “The larger networks become ever more efficient. Technology magnifies lane density and velocity.”

Nearly record-low interest rates, which makes long-term financing attractive for carriers, is a major factor behind these acquisitions.

Toward that end, David Jones, director of global investment strategy at Bank of America, recently told Marketwatch, “In the next 5,000 years, rates will rise, but there’s no fear on Wall Street this happens anytime soon.”

Bank of America recently pointed out there was a record weekly inflow to Treasury inflation-protected securities of $3.2 billion. In another sign of low interest rates, the 10-Year Treasury Inflation-Indexed security yielded a record low negative 1.15% in early August.

Avery Vise, vice president of trucking for research firm FTR, said he expected further M&A activity in trucking because of the changing nature of ground transportation.

“That’s going to be a trend,” Vise said recently. “Time was when shippers used to move stuff via either truckload or LTL. But those labels don’t really matter any longer. So I think we’re going to see more of that.”

Broughton agreed, adding he expected the current M&A trends to continue because the Federal Reserve has signaled it intends to keep the federal borrowing rate near historical lows.

“The advantages of scale will only increase,” Broughton added.

Because there are more than 700,000 registered trucking companies at the Department of Transportation, Broughton said the slightly condensed trucking market is nowhere close to scrimping choices for shippers.

“We’re nowhere near monopoly or oligopoly conditions for that to be a concern,” he said. “The same technology that magnifies scale (for carriers) also provides price discovery for shippers. Gouging can’t last for longer than a single transaction.”