Better Economy May Lead to More Mergers, Acquisitions, Transportation Analysts Say

By Rip Watson, Senior Reporter

This story appears in the April 12 print edition of Transport Topics.

An improving economy could kick-start the pace of mergers and acquisitions in the months ahead, after a moribund 2009, when few deals took place, several transportation analysts said.

Among those who believe the merger pace will accelerate is Richard Mikes, a managing partner at Transport Capital Partners, which arranges trucking acquisitions.

“We are having more calls and more potential activity in the first quarter than what we had in all of 2009,” Mikes told Transport Topics on April 5.

Last month, Knight Transportation disclosed in its annual report an option to buy a truckload carrier with annual revenue of about

$450 million. Phoenix-based Knight, whose sales last year topped $600 million, did not respond to requests from TT for comment about the filing and has not identified the carrier.

Fewer than 50 mergers and acquisitions were completed last year, according to TT data. The busiest recent year was 2007, when Jerry Moyes bought back Swift Transportation from other investors for $2.5 billion and 76 other deals were done.

Mikes said the recent acquisition interest is being driven by factors such as the improving economy, the potential for more business and a modest pickup in used truck prices this year.

Similarly, Thom Albrecht, a BB&T Capital Markets analyst, said in an investor note on April 6 that the merger pace could pick up at the same time that the economy recovers.

Mikes also said the climate for mergers and acquisitions is being fueled by recent increases in the price of publicly traded fleets’ stock, which trickles down to private deals in the form of higher transaction prices.

On average, trucking shares measured by the Standard & Poor’s Trucking Index have gained 21% in the past two months.

“There is a lot more optimism in the marketplace out there,” Mikes said. “When we tried unsuccessfully to put deals together, the reason was that too many carriers are under water,” meaning that they owe more on their trucks than the equipment is worth to a buyer.

“There is at least the perception that used truck values are rising, but these assets still aren’t worth what they should be,” he added.

John Larkin, an analyst for Stifel, Nicolaus & Co. Inc., had a different view, saying that he didn’t believe merger activity will pick up right away.

“Sellers will wait for better times and higher valuations,” he told TT.

“Used trucks are still under water.”

Meanwhile, Knight said its purchase option was part of a consulting agreement. The company was paid $1.4 million to help the unidentified fleet reduce its costs. The consulting deal runs through May 2012.

Jon Langenfeld, an analyst for Robert W. Baird & Co., said in an investor note the move gives Knight the ability to “look under the hood and take a test drive before committing capital.”

Knight said in its announcement that it would buy 49% of the carrier first, and then the rest at a later date, if it decided to proceed. The purchase option is subject to expiration dates and conditions that were not disclosed.

Knight has expertise in cost control and profit maximization. It finished 2009 with an operating ratio 85.7, the lowest of any publicly traded trucker.

Larkin noted that Knight has made consulting arrangements for many years but has never made a major acquisition. He said he believes it is unlikely that Knight will complete a deal because of concern that a purchase will be “too risky.”

The truckload carrier has made four acquisitions since 1999, all firms that operated between 50 and 200 trucks, Langenfeld said in his report.

Knight operates 3,400 trucks. Langenfeld’s report estimated that the potential target operates at least 2,500 trucks.

Larkin credited U.S. Xpress Enterprises executives Ray Harlin and Max Fuller with creating the model of buying a minority stake, turning around the business and then buying the rest of it.

Among the few publicly traded companies that made acquisitions last year were UPS Inc., Landstar System and Universal Truckload Services. However, no publicly traded carrier spent more than $20 million on an acquisition during 2009.

Three acquisitions during the year — Greatwide Logistics Services, Gainey Transportation and Velocity Express — involved new owners that took over after reorganizations were completed.

Gainey, a $300 million carrier in 2008, was sold in a bankruptcy proceeding for $77.8 million. That was the highest publicly disclosed price for any trucking transaction last year.