In the first seven months of this year, we have witnessed two of the largest acquisitions in the LTL trucking sector in many years. In January we observed the acquisition of UPS’s LTL division by TFII, the large Canada-based transportation conglomerate. Last week the nation’s largest TL carrier, Knight-Swift Transportation (NYSE: KNX,) acquired AAA Cooper Transportation in a $1.35 billion deal. AAA Cooper runs a regional network of 70 facilities and 3,400 doors spanning from El Paso, Texas, to the Southern East Coast, along with multiple locations in the Midwest. Knight-Swift purchased a company with a fleet of 3,000 tractors and 7,000 trailers for less than 10x EBITDA.
At $43 billion in revenue, the US LTL sector is approximately one tenth the size of the truckload industry. For many years this was a highly competitive low margin business. What is driving these large M & A activities in the LTL sector by predominantly truckload carriers?
Continued Strength in Manufacturing
Manufacturing and industrial activity, which can account for up to 85% of LTL tonnage for some carriers, has been strong during the pandemic. The Manufacturing PMI (Purchasing Manager’s Index) was 60.7% in June. The overall US economy has expanded for eleven consecutive months.
FedEx (NYSE: FDX), operates a terminal network covering 89% of U.S. business addresses within a 60-minute drive time. The AAA Cooper business, a somewhat smaller regional player, affords Knight-Swift an opportunity to take advantage of the strength of the manufacturing sector and of the less cyclical nature of the LTL industry as compared to the truckload sector.
Barriers to Entry
“When was the last time there was a significant new entry in this market?” asks Satish Jindel, principal of SJ Consulting, a firm that closely tracks the LTL market. (The answer to that question is Con-way, now XPO Logistics, in 1984). That’s because unlike their TL allies, LTL carriers need more than a truck, a driver and a customer. They need real estate on which to build their 200 to 300 terminal networks, and they need sophisticated sorting and package dimensioning technology. Then they need a combination of $150,000 tractors, $25,000 trailers and $80,000-a-year drivers that they must manage effectively to turn a profit.
Some companies have tried to build an LTL network via the acquisition route. Vitran is one example of a company that tried to sew together a patchwork of small LTL carriers. The company failed and sold off its business to Central Transport in 2013.
Pricing Discipline
The last couple of freight downturns have shown that pricing in the LTL industry remains stable, allowing carrier margins and valuation multiples to expand, according to UBS equity research analyst Tom Wadewitz. LTL pricing has been in a positive range of 2% to 5% over the last decade as the less fragmented, high barriers to entry industry remains committed to yield improvement. This is a great time to be a less-than-truckload (LTL) carrier. Unlike their truckload (TL) competitors where pricing discipline is scant because of ease of market entry, the top 10 LTL carriers control about 75% of the total $43.6 billion market.
Cross-Selling / Driver Recruitment
LTL carriers typically have a much larger customer list than TL carriers. Knight-Swift will be able to cross sell its other three offerings to AAA Copper’s customers. There may also be benefits in driver recruitment and retention. Knight-Swift can now offer a career path for TL drivers, some of whom could migrate to LTL which requires more experience and gets them home more regularly.
Revenue Growth Potential
UBS analyst Tom Wadewitz said the addition of an LTL operation provides both organic and inorganic growth opportunities. “While there is likely room for purchasing and other synergies and OR improvement, we believe the more compelling aspect of the acquisition is that it provides KNX with a platform for future growth in the LTL business through both organic expansion of [AAA Cooper’s] terminal network and also through potential additional LTL deals.”
Transforming Truckload Carriers into One Stop Shopping Multi-Service Transportation Organizations
“Amazon is building a network of more than 150 fulfillment centers around the country, which also plays to LTLs’ market strengths,” says Jindel. “The only way Amazon can offer next- and two-day deliveries is by having fulfillment centers near where you live. By putting them close to people, that freight is coming by LTL, not truckload. Demand will be there, and capacity will be short.”
Successful freight transportation organizations now need First Mile, Middle Mile and Last Mile delivery services to meet the needs of their customers. Acquiring a major LTL provider allows freight companies to provide complete one-stop transportation services.
Market Stability
Yellow Freight, one of America’s largest LTL carriers has been under financial duress for the past decade. The company has been salvaged into profitability by a $700 million loan from the federal government under the Coronavirus Aid, Relief and Economic Security (CARES) Act. Among other things, that allowed Yellow to modernize its fleet. Yellow and its three regional subsidiaries planned to buy about 300 new tractors and 950 trailers during the first half of this year as it underwent a badly needed face lift. This should stabilize the industry.
Experience in Successfully Integrating Acquisitions
The leadership management teams of TFII and KNX have a track record of integrating and turning around underperforming operators. Knight’s merger with Swift Transportation is the best example of this. With a highly leveraged balance sheet and severely depressed margins, the carrier was anything but a model fleet when the 2017 deal was struck. However, through an operational overhaul and significant equipment and technology investments, the Swift fleet’s performance has surpassed the operations of the Knight fleet. Knight-Swift also has significant integration experience, making several acquisitions in the past like Barr-Nun, Abilene Motor Express and most recently third-party logistics provider UTXL. Clearly this expertise is critical for truckload carriers contemplating the acquisition of an LTL carrier.
Other Targets
There are other highly competitive, well-run private LTL carriers such as Pitt Ohio, Estes Express, Southeastern, Saia, and Averitt Express. These could be attractive targets for other truckload carriers seeking to emulate the strategies of TFII and KNX.
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