Transportation, logistics M&A not slowing down

‘We’ve never been busier — ever’

M&A activity in the supply chain remains robust even as the freight industry enters the downside of the cycle. Multiple quarters of record earnings and cash flow generation have provided transportation companies the opportunity to solve for capacity, headcount and other supply constraints through acquisition. Providers are also continuing to diversify their offerings to mitigate cyclicality.

“We’ve never been busier — ever,” Peter Stefanovich, president at Left Lane Associates, told FreightWaves. “Even with the macroeconomic trends that are going on … because of the industry and the resilience, the multiples and the value of what people are looking for from an acquisition standpoint are holding steady, they’re not diminishing.”

Left Lane is a Toronto-based M&A firm focused on investments in transportation and supply chain companies.

Plugging holes with M&A

A midyear report from consulting firm PwC showed transaction value for the transportation and logistics space over the last 12 months was up 6% compared to full-year 2021, but the number of deals was down 7% over the same time. Deal value was up in trucking, passenger air and shipping, but lower in the logistics space, albeit twice the level seen prior to the pandemic.

Stefanovich said public deal counts can be misleading as roughly two-thirds of his firm’s transactions are kept private for competitive reasons. He estimates valuation multiples are anywhere from 20% to 75% higher than where they were prior to the pandemic. The high end of the range is reflective of specialty providers and hard to replicate assets like flatbed and less-than-truckload providers.

“Shortages for power units, trailers, other transportation-related equipment … that’s creating the condition where rates and multiples are still where they are instead of coming down,” Stefanovich continued. “Companies don’t have the physical assets to move product on.”

With heavy-truck OEMs likely to struggle to catch up to demand over the next several quarters, the premium values placed on equipment aren’t likely to materially recede in the near term. However, fleets with deep coffers are using M&A to sidestep supply constraints. Many continue to acquire competitors, noting that it’s not just an acquisition of another carrier and its accounts that are attractive but the ability to quickly pick up equipment, terminals and drivers.

Heartland Express (NASDAQ: HTLD) recently announced the acquisition of the over-the-road and refrigerated TL fleets from Contract Freighters Inc., which is owned by TFI International (NYSE: TFII). The $525 million deal gave Heartland 2,100 tractors, 8,000 trailers and six terminals.

“CFI, what they bring in this transaction is some open trucks,” Heartland CFO Chris Strain stated on a call with analysts discussing the deal. “In a time when we can’t get our hands on some trucks … we have opportunities to fill some seats.”

This was Heartland’s second acquisition this year. In June, it announced the acquisition of dry van carrier Smith Transport and its 850-tractor fleet for $170 million.

The industry’s equipment orderbook remains oversold and fleets have been forced to extend trade cycles. Production schedules were knocked back during the pandemic due to multiple COVID-related shutdowns and the group continues to navigate parts shortages due to supply chain and manufacturing delays abroad. All of these factors are keeping equipment prices elevated.

Stefanovich said M&A in trucking is highly correlated with equipment prices and availability. “Because that goes hand in hand, I don’t think there’s going to be a real major downward correction on [deal] multiples until sometime in 2024 — probably the latter part of 2024 or beyond.”

Shopping for assets in different modes

“They’re looking at ways to spread out the types of pits and peaks that they see in the market by having different verticals that they are focusing on. And it allows them to cross-pollinate and cross-sell massively,” Stefanovich said.

Many carriers are expanding the playbook to include anything not tied to traditional one-way TL. Dedicated, intermodal, brokerage and asset-light offerings are now accounting for a larger share of carrier revenue than in prior cycles.

Schneider National’s (NYSE: SNDR) intermodal and logistics units accounted for 60% of revenue last year compared to just 42% in 2017. The company’s dedicated unit is now larger than its network, or one-way, operation. One-way was only 47% of total TL revenue in the first half of 2022 compared to 67% in the same period of 2017.

The nation’s largest carrier has branched out as well. Knight-Swift Transportation’s (NYSE: KNX) TL revenues in the second quarter were just 57% of total revenue. In recent years, the company has further extended its logistics (14% of revenue) and intermodal (8% of revenue) businesses, launched a support services unit for third-party carriers (8% of revenue) and acquired two LTL carriers (13% of revenue).

The thesis is that a diversified model will help smooth out the highs and lows of the asset-based TL cycle.

“People want to gain market share … whether they have an existing asset-based fleet or just add scale by adding a different line of focus from a logistics standpoint than what they’re used to,” Stefanovich said. “It’s not just in trucking, it’s in logistics as well and warehousing too. If you look at it across the board it’s going to be strong.”

Buyers coming from far and wide

A number of foreign buyers are interested in domestic transportation assets. In recent months, there have been several large acquisitions of U.S. assets from abroad.

United Arab Emirates state-owned investment fund Mubadala Capital acquired Canada Cartage and its 4,000 tractors for an undisclosed sum in August. German logistics provider DB Schenker announced an agreement to acquire TL carrier USA Truck (NASDAQ: USAK) for $435 million in June. The deal will provide the global freight forwarder with end-to-end control over trucking assets in the U.S.

In February, Danish shipping company A.P. Moller – Maersk (MAERB.C.EB) announced the acquisition of Pilot Freight Services, a U.S.-based forwarder, for $1.8 billion. Maersk previously acquired U.S. assets, including warehousing and distribution provider Performance Team in 2020 and e-commerce fulfillment company Visible SCM in 2021. Maersk’s footprint now includes roughly 150 facilities in the U.S.

Danish freight forwarder DSV (DSV.C.DX) has been rumored to have interest in U.S. freight broker C.H. Robinson’s (NASDAQ: CHRW) assets.

Stefanovich said he’s also seeing inbound inquiries from companies looking to vertically integrate. Various operators in the heavy-industrial sectors have recently shown interest in buying a fleet to bypass future truck capacity concerns.

“Never before has there been interest like there is in the North American supply chain market,” Stefanovich said. He believes that nearshoring will continue as supply chains look to avoid China and ocean shipping, ultimately prompting further investment across the continent. 

He said buyers he’s engaging with include private equity, family offices, venture capital, public and private strategic investors and even high-net worth individuals. They all have an interest in owning domestic transportation and logistics assets, according to Stefanovich.

Private equity firms have $2.3 trillion in capital, a 3x increase over the last 15 years, that needs to be deployed, according to PwC. This investor segment now accounts for half of all deal flow, up from just one-third five years ago. The need to chase returns and outperform benchmarks has driven the increase. However, the job is getting more difficult as inflation and interest rates step higher.

“They’ve made a ton of money over the last two years,” Stefanovich said. “They have a significant amount of dry powder to still deploy. From a macroeconomic standpoint, when there’s volatility that’s the best time for them to buy businesses.”

Stefanovich said there are still numerous potential sellers in the pipeline. Many operators got into trucking following deregulation in 1980 and don’t have a succession plan. “Father Time is here. We have to exit eventually. So why not do it at a good time instead of go through another pandemic or another housing crisis or whatever.”

He believes those that wait to buy will get left out as valuations and takeout multiples are unlikely to retreat anytime soon.

“If somebody’s waiting, there are other parties that are sitting there saying well we’re going to jump in because we’re not going to miss this,” he concluded.