Smaller Fleets Seeking Buyers as Strategy to Avoid Bankruptcy

By Jonathan S. Reiskin, Associate News Editor

This story appears in the July 21 Print Edition of Transport Topics.

Behind this year’s surge in trucking company failures, brought on largely by the double-whammy of slow freight and skyrocketing fuel prices, is another ominous trend: a sharp increase in the number of motor carriers asking larger competitors to buy them out.

A report earlier this year showed that 935 carriers failed during the first three months of 2007 (4-21, p. 3). Now, trucking executives, consultants and investors say those failures have been followed by fleet managers asking bigger companies to buy them, so they can exit the industry with some cash in their pockets.

“A big slug of companies are being presented to us to buy. It’s at least double what it was six months ago,” said David Rusch, president of CRST International’s carrier group.

“We’re getting phone calls and e-mails on this, either directly from owners or their brokers, of about 10 per week,” said Stephen Russell, chairman and chief executive officer of Celadon Group. CRST ranks No. 29 on the new Transport Topics 100 list of the largest for-hire carriers in the United States and Canada, and Celadon is No. 52.

Bruce Jones, president of KSM Transport Advisors, called the selling off “pervasive” and said the large number of carriers for sale has depressed the price-earnings multiples being paid from “the low fours” [more than four times earnings] to “less than four.”

Multiples of EBITDA, or earnings before interest, taxes, depreciation and amortization — cash flow, is a common method for appraising the value of a business.

Jones characterized the sales as “orderly liquidations.”

Lana Batts of Transport Capital Partners said she is encountering numerous fleet owners who “are tired, tired, tired. They want to sell, but they don’t want to give their companies away.”

Batts said the slow tonnage environment, which has actually started to improve (7-7, p. 1), has not been severe by historical standards, “but fuel is driving people crazy.” She said many are executives 60 to 65 years old, who started their careers in the highly regulated less-than-truckload era, made the switch to a deregulated truckload business model, and then learned how to use computers.

“But they don’t want to learn the business a fourth time, and often their kids don’t want to take over their companies,” said Batts, a former president of the Truckload Carriers Association.

Trucking management in the age of fuel prices gone wild is a daunting challenge, Celadon’s Russell agreed. While fuel surcharges have helped lessen the sting somewhat, they also have created a dangerous side effect related to working capital, or daily liquidity.

“The accounts receivable that companies are carrying because of fuel surcharges have gone up meaningfully, perhaps by as much as 50%,” he said. While carriers might have to wait 45 days to collect payments from shippers, Russell said carriers usually have to pay their current fuel bills within a week.

To finance this larger stream of moving funds, he said, carriers need more cash on hand, which they probably will have to borrow. However, problems in the finance industry have diminished lenders’ eagerness to fund companies operating on tight margins. Hence, the phone calls to Celadon, which has been active in the acquisition market this decade.

Russell said he sees valuations for motor carriers beaten down to simple asset values, and hard assets at that.

“The value of used tractors and trailers is less. For trailers, it’s about 30% less than a year ago.

“Some businesses have ‘good will’ if they have excellent long-term contracts or patents, but trucking mainly has one-year contracts. In the absence of cash flow, there isn’t much value to good will,” Russell said.

Rick Gaetz, CEO of Vitran Corp., said the trend applies to the less-than-truckload world as well. Vitran has been active in making acquisitions in recent years, and this has generated calls from smaller LTL carriers.

“We’ve seen more opportunities recently, but not all of them are exciting. Some of these companies are just too far gone. Tough times like these create more merger activity,” said Gaetz, whose Toronto-based company is No. 41 on the TT 100 for-hire list.

Private equity firm Fenway Partners is still buying trucking companies, said managing director John Anderson, but he is not providing an escape pod for battered fleets. Anderson helped to roll up Greatwide Logistics Services and is now chairman of intermodal pro-vider RoadLink.

“There are definitely more companies looking to have someone buy them. The ironic thing is that the weaker a company is, the more likely they are to seek a buyer, but the less attractive they are.

“The more attractive a company is, the less likely it will be for sale now because management knows it’s a buyer’s market now. You don’t want to be a seller now if you don’t have to be,” said Anderson. He added that Fenway looked at 300 transportation and logistics firms in 2007, got into serious talks with about 20 and wound up making 10 acquisitions during the year.

Dan England, chairman of C.R. England Inc., the largest refrigerated carrier on the TT 100, said his company is not buying any motor carriers right now. He said his family business recently bought non-asset-based freight forwarders, even though they are priced at higher multiples of cash flow than are companies with trucks.

“You get a better return on your investment,” he said of the non-asset-based group. With his company owning 1,276 tractors and 5,342 trailers, England said the pressure on owners of assets is “very frustrating,” and that he hopes that, when the current business cycle improves, the owners of assets will be rewarded for that frustration.