Knight Raises USA Truck Holdings To Bolster Its Takeover Proposal

This story appears in the Oct. 7 print edition of Transport Topics.

Knight Transportation Inc. stepped up its unsolicited takeover bid for USA Truck Inc. last week, a move analysts said illustrates the growing interest in acquisitions among well-capitalized fleets.

Knight on Sept. 30 said it was contacting USA Truck shareholders to line up support for its $95 million cash offer for the fleet, which is based in Van Buren, Ark., while also increasing its holdings in USA Truck to 11.3% from 8%. USA Truck on Sept. 26 said Knight’s $9-per-share offer “substantially undervalues” the company and has not made public comment since.

“We have had discussions with several of USA Truck’s largest shareholders that have indicated their support for our proposal and have encouraged us to continue to take the necessary steps to acquire USA Truck,” said the statement from Knight, whose offer also includes assuming $147 million in debt. “We are prepared to take the necessary steps to make this combination a reality.”

Analysts said there are a number of reasons why fleets with little debt and high profit margins are pursuing acquisitions, including a need to add drivers at a time when tighter hours-of-service rules are squeezing equipment utilization, and the potential to build a business faster than organic growth would allow in a weak freight environment.

“Regulatory changes are forcing companies to look at opportunities to make sure they have enough capacity to service their customers,” Peter Troup, a director at EVE Partners, an investment bank specializing in transportation and logistics mergers and acquisitions, told Transport Topics.

“There are always going to be a handful of factors that are going to drive companies into a deal,” said Troup, whose company facilitated Gordon Trucking’s 2011 purchase of truckload fleet Buske Lines. In addition to adding equipment and drivers, Troup said, access to capital at low interest rates is an important ingredient as well to spark acquisitions.

“There are confident, capable buyers with the resources and a lot of capital access, and companies that are not succeeding in the market,” said John Anderson, advisory director at private equity investor Greenbriar Equity Group, citing Knight as an example of that type of buyer.

“Most carriers don’t see enough organic growth in their own market.

That is a natural recipe for people to look outside their companies,” said Anderson, whose company in May acquired logistics operator Transplace.

Knight, with a trucking operating ratio of 83.5 this year, sees the potential to gain as much as 40 cents per share in earnings, said another analyst, who requested anonymity. That’s a potential increase of as much as 50% over Knight’s earnings last year of $64.1 million, or 80 cents per share. In contrast, USA Truck lost $3.5 million in the first half of 2013, posting a 104.4 operating ratio that was the worst among publicly traded truckload operators.

Meanwhile, interest in acquisition of Vitran Corp.’s Canadian assets increased last week, as Canadian carrier Clarke Inc. boosted its 10% stake in the company, and another shareholder called for an auction. Transforce Inc., which in late September made an offer for the Canadian assets, already increased its holdings in Vitran.

Last month, Vitran agreed to sell its U.S. assets to Michigan trucker Matthew Moroun.

For Knight, besides opposition from USA Truck’s board and management, the Phoenix-based company faces two other obstacles — a shareholder rights plan and insider ownership of the company’s shares.

USA Truck’s “poison pill” plan, adopted last year, takes effect if someone acquires 15% or more of the stock. The plan grants additional shares to existing holders in an effort to thwart hostile bids. It’s subject to renewal at USA Truck’s shareholder meeting in May.

The founders of USA Truck also hold 17% of the company’s stock, which will make Knight’s takeover more difficult, according to a report from Cowen Securities analyst Jason Seidl.

If combined, a $1.5 billion company focused on regional truckload service would be created from two of the Transport Topics Top 100 for-hire carriers in the United States and Canada. Knight is No. 31, and USA Truck is No. 52.

Knight could raise its offer by about $1 per share, analysts said, to bring the price in line with USA Truck’s book value of about $10 per share.

Troup also said that Knight’s move is the latest step in consolidation that has been driven by healthy companies purchasing distressed carriers.

“A lack of available drivers is a larger constraint to growth than underlying freight demand,” said a report from analyst Art Hatfield at financial services company Raymond James.

“Knight is well-positioned to attract drivers in the current environment with a relatively young fleet and its regional service center network,” Hatfield said in his report.

His report noted that USA Truck has been approached about acquisitions “by at least a few companies” in recent years. One of those that received the cold shoulder was Celadon Group Inc. in 2011.