Private Equity Reshapes Trucking as Investors Bolster Top Carriers

by Daniel P. Bearth September/October 2007
A rising tide of buyouts by private equity firms is changing the competitive landscape of trucking. Not only is the process accelerating a transition from small family-run companies to large, professionally managed corporations, it is changing the way many for-hire carriers are organized and managed.

“Private equity is raising the bar,” said Benjamin Gordon of BG Strategic Advisors, a business consulting firm in Boston that specializes in the transportation and logistics sectors. “Companies who compete against private equity-backed companies are going to find it tougher to succeed because capital is flowing to the best companies and giving them the resources to accelerate their growth.”

In just the first five months of 2007, private equity firms have acquired 16 for-hire carriers, more than all of last year. In addition, several publicly owned trucking companies, including truckload carriers Swift Transportation and Smithway Motor Xpress and parcel carrier CD&L Inc., have been taken private or merged with other publicly owned companies.

Two of the nation’s largest auto-haulers, Allied Holdings and Performance Transportation Services, were taken over by a private investment company — Yucaipa Cos. — with close ties to the Teamsters union, giving labor leaders unprecedented control over management and wiping out the value of stockholders’ investment in both companies.

The trucking industry has seen surges in outside investment before. However, private equity firms appear to be targeting well-run companies — unlike leveraged buyouts in the 1980s, driven by low stock prices and high-interest debt, or corporate roll-ups in the 1990s, most of which failed. They are focusing on making them bigger and better, rather than buying what are perceived as undervalued assets or attempting a major restructuring in order to turn a quick profit.

Doug Christensen, a former executive with USF Corp. who recently joined Chapman & Associates, a merger and acquisition advisory firm, said investors today are more discriminating about the companies they buy. “We [have] gone through the conglomeration cycle and the hot industry cycle,” he said. “We no longer have ‘hot’ industries. We have companies within all industries that are doing well.”

John Anderson, a partner with Fenway Partners, a private equity firm that has made more than two dozen acquisitions over the past six years, said the goal is to “leave good companies in our wake. We are more certain of getting a return with a better business than we would through some financial engineering,” he said.

In December, Fenway sold controlling interest in its biggest holding, Greatwide Logistics Services, to two other private equity firms, Investcorp and Hicks Holdings.

Over the past six years, annual revenue for the Greatwide organization, which now includes trucking, warehousing and freight brokerage services, grew from $175 million to $1.2 billion, Anderson said. Fenway still owns Panther Expedited Services, intermodal group RoadLink USA and its latest “platform” company Gemini Traffic, a freight brokerage firm.

Fenway’s approach, which includes giving owners of acquired companies a stake in the fund, appeals to many potential sellers, said Marc Kramer, a Fenway partner who works with Anderson to pursue deals in the transportation sector. “We see good momentum with our franchise,” Kramer said. He noted that the company has looked at more than 300 buyout proposals already this year, compared with 220 in all of last year and 150 in 2005.

Competition for buyouts is such that some investment firms are beginning to target companies that aren’t even for sale to avoid bidding up prices, said Kathleen Ross, a vice president at LaSalle Bank in Chicago. “Private equity firms are aggressively calling on potential candidates to avoid an auction situation that can drive up the price,” she said.

Ross said nonbank investment firms accounted for 80% of all corporate financing activity in 2006. Ten years ago, she said, the numbers were flipped, with nonbank investment firms providing no more than 25% to 30% of all corporate financing.

“It is a favorable market for borrowers,” said Dave Thomas, a financial analyst at LaSalle. “Banks continue to enjoy a relatively low level of problem loans and that has created an environment in which banks are competing for loans.”

Not all buyouts involve private equity firms. In June, Max Fuller and Patrick Quinn, founders of U.S. Xpress Enterprises, announced a plan to take the company private.

In addition, Swift Transportation, one of the most widely followed stocks among publicly owned trucking companies, was taken private in May by company founder and former chairman Jerry Moyes.

Swift was one of a few fast-growing truckload carriers — J.B. Hunt Transport Services and Heartland Express were two of the others — that completed initial public offerings in the 1980s. Over the years, Swift used proceeds from the sale of stock to fuel expansion of its fleet and to make numerous acquisitions, the last of which — M.S. Carriers — proved to be the toughest. Moyes was ousted from Swift after an investigation by the Securities and Exchange Commission raised questions about stock sales. He remained a large shareholder and has many interlocking business agreements with Swift.

Moyes said, in a recently published interview, he sees more benefit to being a private company now because he can make decisions without worrying about meeting quarterly profit targets or spending large amounts of money to comply with public company reporting requirements.

Other publicly owned companies have been active in making acquisitions as well. Both UPS Inc. and FedEx Corp. have purchased motor carriers as a way to expand and diversify their parcel operations. UPS bought Overnite Transportation Co. and FedEx bought Watkins Motor Lines.

Some publicly owned carriers have also accepted buyouts. In June, stockholders of Smithway Motor Xpress approved a deal with Western Express, a company that had planned to do an initial public offering of stock last year but has not yet completed it.

In fact, no trucking company has completed an initial public offering since Canada Cartage went public in March 2006. And now, barely a year after becoming a public company, Canada Cartage is being taken over by private equity firm Nautic Partners.

Richard Mikes, a former executive at Ruan Transportation Management Systems who advises business owners on mergers and acquisitions, said new private equity investors are providing an alternative for trucking companies looking to sell their business.

“It’s given trucking more liquidity,” he said. “That keeps the industry healthier in the long term. At least I’d rather have more money coming in rather than less.”

Mikes said trucking is made up of thousands of small and mid-size carriers that “have reached a plateau or critical mass and ask, ‘What do we do next?’ The answer today tends to be private equity.”

But Mikes also detects a major difference in the way private equity investors and classic trucking company owners view potential deals. “The private equity investor is driven by financial parameters,” he said. “The typical questions are: What is the cash flow? What is the return on assets? What is the capital expenditures?” Among traditional trucking company owners, Mikes said the questions are: What is revenue per mile? What is the operating ratio? What is the utilization of equipment? How much fuel surcharge are you getting? What are the miles per week?

“Traditional trucking company owners are more conservative in use of debt,” Mikes said. “They’ve been through good cycles and bad cycles and once you go through a bad cycle, you do not want to do it again.”

Most private equity firms expect their portfolio companies to generate returns of at least 30% annually, said logistics consultant Gordon.

“This means they tend to seek companies who are growing at a fast rate and they tend to borrow as much debt as possible, to increase their return on equity,” he said.

Gordon said private equity firms are fueling what you might call the “fruit fly effect.” With fruit flies, evolutional cycles are compressed because fruit flies go through birth, life and death in just one day. “The same is true with private equity,” Gordon said. “As more money flows to innovative logistics companies, the cycles of change will continue to accelerate. This will create more and more wealth for a smaller and smaller group of winners.”

“Growth is the best driver of value,” said Fenway’s Anderson, “but we also work on operational efficiency, building new services and products with the company.”

Growth and profitability go together, said Fenway’s Kramer. Profits at RoadLink USA, for instance, quadrupled while revenue increased from $200 million to $450 million over four years, he said.

Andy Clarke, chief executive of Panther Expedited Services, said the company’s affiliation with Fenway has provided resources to expand its on-demand freight service from the dry van sector to the refrigerated and air cargo sectors and the military. “There is an alignment of interests between investors and management that leads to a high degree of focus,” Clarke said.

Seth Wilson, a partner in Jeffries Capital, said his goal is to work with existing carrier management to grow the business. Jeffries sold a stake it held in truck-load carrier Arnold Transportation to U.S. Xpress Enterprises and now owns controlling interest in New Jersey-based New Century Transportation and munitions hauler R&R Trucking in Joplin, MO. “These companies are already operating well,” Wilson said. “We simply provide capital to grow.”

In December, New Century acquired Colorado-based Western Freightways, giving the company a platform for expansion in western states.

Todd Solow, a principal at Norwest Equity Partners, said the firm’s 2004 purchase of Jacobson Cos., an Iowa-based dedicated contract carrier and warehouse specialist, recently paid off with the sale of controlling interest to Oak Hill Capital Partners. The company’s strategy, Solow said, was to help diversify Jacobsons customer base, which it did by making four acquisitions. The deals helped boost Jacobson’s business in the food and grocery industry and gave it a foothold in packaging services.

Adam Lehrhoff, a partner with ZS Fund, said his firm acquired controlling interest in Transervice Lease Corp., Lake Success, NY, a dedicated contract carrier and equipment leasing and rental firm, because they saw the potential to build on an established and successful business. “We see growth internally and through acquisitions,” Lehrhoff said.

Joe Evangelist, executive vice president of Transervice, said freight management and brokerage are two areas of interest for expansion.

Dave Thomas, a trucking industry financial analyst at LaSalle, said although most private equity firms prefer to invest in companies that don’t own a lot of assets, he sees a strong market for asset-based and non-asset-based companies. “There’s enough capital for everybody,” he said.

In his experience, Thomas said, few companies will consciously change their business strategy to make themselves more appealing to potential buyers.

Still, he said, “It’s not surprising that firms contemplating selling would be trying to place greater emphasis on non-asset-based operations.”

Chapman & Associates’ Christensen said he expects buyout activity to remain strong leading up to the 2008 elections and the possibility of a change in political power that could lead to increases in capital gains taxes.


Daniel P. Bearth is the senior features writer for Transport Topics. This article was reprinted with permission from the July 23, 2007 issue of Transport Topics.

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