Experts See 2011 Merger Wave as Three Fleets Announce Deals

This story appears in the Jan. 24 print edition of Transport Topics.

Carrier acquisition announcements this month by three fleets provide a clear signal that the pace of trucking mergers will pick up in 2011, industry officials said.

The purchases by three companies in the Transport Topics 100 list of the largest U.S. and Canadian for-hire carriers were:

• No. 21 Greatwide Logistics Services’ Jan. 17 acquisition of refrigerated carrier Overton Transportation from food-service supplier Sysco Corp.

• No. 35 Vitran Corp.’s Jan. 14 agreement to buy less-than-truckload assets from Milan Express.

• No. 85 Transport America’s Jan. 13 announcement of its acquisition of Southern Cal Transport, another truckload operator.

“The market for acquisitions is better because people are feeling better about the economy,” Dahlman Rose & Co. analyst Jason Seidl told Transport Topics on Jan. 20. “If carriers have been shopping themselves and talking to people, you’re probably more apt to pull the trigger now as a buyer.”

Those moves early in 2011 could signal a resurgence in acquisitions that have fallen from 90 in 2006 to barely 50 transactions in each of the past three years, based on Transport Topics compilations (12-20 & 27-10, p. 22).

“There is going to be a dramatic increase in the number of acquisitions that will take place in 2011,” Lana Batts, a principal at Transport Capital Partners, told TT.

Batts cited several reasons for her prediction.

Owners of aging fleets are eager to sell at the same time that fleets are eager to acquire equipment and drivers, she said.

Buyers are driven by expectations that new federal rules will strain trucking capacity and are turning to acquisitions to avoid costly purchases of new tractors. Moreover, fuel prices are at a two-year high, which will increase selling pressure on weak fleets, she added.

“Buyers are sitting there, looking at the market and saying, ‘I believe there is going to be a capacity crunch.’ They are saying, ‘I need more [capacity], and I’m going to acquire another company,’ ” Batts said.

John Anderson, managing director of private equity firm Fenway Partners, told TT on Jan. 13 that the pace of sales will increase, driven by the stronger economy.

“There will be an increase in deals,” Anderson said, citing his firm’s growing confidence in the economy and the freight market, but he said he expected the increase to be “slow.”

Seidl said he wouldn’t be surprised if Vitran’s move was a sign that Saia Inc., Old Dominion Freight Line, Knight Transportation and Celadon Group Inc. could make similar acquisitions.

Other analysts agreed that the moves were a positive sign of things to come.

“The acquisitions highlight upbeat trucking outlooks,” said Justin Yagerman, a Deutsche Bank analyst.

Thom Albrecht, an analyst at BB&T Capital Markets, said he expects Vitran’s purchase will boost earnings in 2011 and beyond. Vitran is expanding into Alabama, the Carolinas, Georgia and Mississippi by purchasing Milan in a deal expected to close on Feb. 19.

Greatwide, Dallas, added about 70 tractors and expanded temperature-controlled freight options through its Overton purchase.

Scott Arves, Transport America’s CEO, said Southern Cal Transport is building capacity to nearly 2,200 drivers in expectation of future shortages (see related article, p. 6).

Terms weren’t announced for any of the acquisitions.

Both Anderson and Batts tied the pace of deals to past financial constraints and future earnings expectations.

“There has been no less of an appetite to do deals over the last couple of years,” said Anderson. “The biggest impediment was the mismatch between buyer and seller.”

In recent years, he explained, company owners typically had overly optimistic estimates about the earning power and the sale price for their firms than did skeptical buyers.

Acquisitions will increase now as the industry’s earnings expectations improve, Anderson said.

“You will see that [faster profit growth] in 2011 and 2012 if the economy continues to grow,” he predicted, noting that trucking earnings historically have risen faster than other industries during economic expansions.

Batts said the deal-making climate had been dampened by expectations that the buyers’ future profits would be low and that debt repayment could reduce the sellers’ proceeds.

She explained that acquisitions are valued by using multiples of EBITDA, or earnings before interest, taxes, depreciation and amortization. A typical EBITDA multiple has been about 5, meaning that the price paid is five times the annual earnings before costs such as interest and taxes are subtracted.

By comparison, a Jan. 14 report by Merger Market Report, a research service, said the average multiple for deals closed in 2010 was nearly 15.

In addition to the financial and capacity factors, Batts highlighted the results of a recent TCP survey that found at least one-third of owners who are at least 60 years old told Transport Capital that they want to sell out in the next six to 18 months.

That percentage is nearly twice the portion of fleet owners as a whole who are interested in selling during the same period.

Batts said her comments weren’t specific to the Greatwide, Vitran and Transport America deals.