Experts Say Aging, Staff Needs Driving Fleet Merger Frenzy

This story appears in the Sept. 17 print edition of Transport Topics.

NEW YORK — Aging fleet owners, struggling small carriers and the never-ending search for enough qualified drivers are combining to heat up the trucking acquisition market this year, according to industry executives and experts.

“I’ve never seen the market so active,” said Andy Ahern, CEO of consultant Ahern & Associates. “That’s crazy when the economy stinks.”

Ahern said the need to add drivers is a key factor in the lively acquisition market, which has enabled his company to facilitate 16 transactions this far in 2012, its busiest year since 2007.

“This is as busy as any time I’ve seen in the last 14 years,” John Anderson, advisory director for Greenbriar Equity Group, said at the Dahlman Rose & Co. investor conference here Sept. 6. “I’m seeing a lot of attempts” by owners to sell their fleets.

Ahern said that roughly half of the sellers were fleet owners who were aging and seeking to exit the industry. The other half, he said, involved companies with younger owners who had trouble raising enough capital for their small businesses.

“Banks with surplus capital are not loaning trucking any money,” he said. “Lenders are taking a hard stance on loaning to smaller companies.”

Buyers see acquisitions as a way to add drivers, said Len Johnson, president of Bennett Motor Express Inc., McDonough, Ga., which last month bought Allegheny Plant Services Inc., a West Elizabeth, Pa., fleet, to add its 50 drivers. Bennett, which has almost 700 active drivers, was trying to deal with its aging driver force, Johnson explained.

“That [driver age profile] was increasing at too great a speed for us,” he said. “There are no replacements coming in. Nobody is encouraging their kids to drive a truck.”

Many of the sellers, Ahern and Anderson said, are smaller fleets, those with 200 trucks or fewer.

“Deal flow has picked up meaningfully over the last several months, and we believe privately owned and private-equity-backed companies, who did not want to sell during the economic downturn, are now looking to monetize their investments, particularly given the outlook for increasing tax rates,” said Michael Coyne, a managing director  at RBC Capital Markets.

Bennett said smaller fleets “are marketing their companies because of government regulations,” primarily the Compliance, Safety, Accountability program from the Federal Motor Carrier Safety Administration.

Smaller companies consider selling because they don’t have the resources necessary to find drivers to replace those disqualified by CSA, Johnson said.

“Today, my sense is that most of the sellers have a price expectation that is too high,” said Anderson. “The valuations [of a company] aren’t tempting enough yet for a buyer. Two years ago, any good company wouldn’t have wanted to sell because the prices [for their company] were too low.”

David Jackson, president of Knight Transportation, said his company is interested in acquisitions but hasn’t completed any deals.

“We feel we are getting closer to an environment where there would be an opportunity for a transaction,” Jackson said. “There’s a lot [of offers] coming through. The problem has been valuation. There are a lot of investment bankers who have things on paper that they think will work.”

“Very few, if any, of the smaller guys have a succession plan,” Jackson said. “These are businesses where the founder is not all that involved, and there is small, single-digit return on capital. They need significant capital to refresh the fleet.”

Celadon Group Inc. is seeing a similar level of interest, its president, Paul Will, said.

“There is a lot of opportunity out there. There are a lot of distressed carriers. Owners are saying, ‘I’m 62 years old, and it will cost me another $15 million to buy trucks.’ They haven’t been able to get financing.”

“We are looking at a lot of deals — all the time,” said Will, whose company has done six acquisitions in the past 12 months to add drivers.

Higher insurance costs also are hurting carriers that run 200 to 400 trucks, Will said, as fleets find that insurance companies want them to pay increased premiums or offer collateral if they don’t have the cash.

During the second quarter, the Avondale Partners LLC survey of fleet failures stood near all-time lows.

The path to a sale, Ahern said in a report, includes realistic expectations by sellers as they evaluate their business’ attractiveness from the standpoints of longevity, profitability, markets served and non-asset features such as technology.

“Sellers also need to recognize what their assets are actually worth — particularly with tractors and trailers,” he said. “Equipment is one of the major ‘stumbling’ blocks on getting a deal completed.”

This year’s largest deal was made by Arkansas Best Corp., with its purchase of Panther Expedited Services for $180 million in June (6-25, p. 1).