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Jun 19, 2023

Transformational deals in trucking during 2022

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Deal flow in the transportation and logistics space slowed notably in 2022 as the economy cooled. Investors have become more risk averse, minimizing exposure to companies with less-proven track records, as interest rates have soared and credit markets have tightened.

Through November, transaction values in the industry totaled $52 billion across 380 deals compared with 600 deals for $181 billion in total during 2021, according to a report from global investment bank Houlihan Lokey (NYSE: HLI).

Even with the slowdown, 2022 will come in ahead of full years 2018 and 2020 as many operators continue to use a sustained stretch of record earnings and cash flows to build out their transportation offerings through M&A.

Trucking saw some transformational deals in 2022. Here's a recap.

Heartland Express (NASDAQ: HTLD) was on the M&A trail in a big way during 2022, acquiring two large truckload carriers in rapid succession.

In June, it announced the $170 million acquisition of Smith Transport, a dry van carrier primarily operating east of the Mississippi River. The transaction onboarded approximately 850 tractors and 2,000 dry van trailers.

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Two months later, Heartland became the eighth-largest TL fleet in the nation when it acquired assets from Contract Freighters Inc. (CFI). The $525 million deal included CFI's TL unit, which primarily operates on the North-South corridor in the Midwest, and its logistics business in Mexico. With 2,100 tractors and 8,000 dry van and temperature-controlled trailers, the transaction was Heartland's largest on record.

The assets were purchased from Canadian transportation heavyweight TFI International (NYSE: TFII) and did not include CFI's dedicated fleet or its brokerage operations in the U.S.

Both deals were executed at roughly a 5x enterprise value-to-adjusted earnings before interest, taxes, depreciation and amortization multiple and were expected to be immediately accretive to Heartland's earnings. The acquired fleets performed at a low-90s operating ratio in the third quarter. Heartland expects the fleets to be running at a low-80s OR within three years as revenue and cost synergies take hold.

Post the transactions, Heartland's network includes 5,550 tractors and 17,800 trailers, which generate $1.3 billion in annual revenue.

Shareholders of TL carrier USA Truck cashed in during the best-ever trucking cycle. After years of being tethered to a high debt burden, which in part led to financial underperformance relative to peers, the fleet was sold to German 3PL DB Schenker in September.

The $435 million price tag represented a 118% premium to USA Truck's share price and roughly 5x trailing 12 months’ adjusted EBITDA.

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USA Truck was profitable on and off during its time as a public company. However, a recent turnaround plan to transform the carrier into a regional operation was boosted tremendously by a sustained trucking upcycle during the pandemic. Efforts to trim the fleet count to a level where it could avoid dependency on the spot market and reprice underwater contracts with shippers pushed the carrier solidly into the black.

During the 2022 first quarter, its last quarterly report as a public carrier, USA Truck's trimmed-down TL segment ran at an 87% adjusted OR.

DB Schenker said it will use the fleet to market directly to the Eastern half of the U.S. and it will roll up USA Truck's brokerage platform under its existing logistics offering.

XPO (NYSE: XPO) moved forward with a plan to break up a decade's worth of acquisitions in 2022. The company spun off its brokerage unit, RXO (NYSE: RXO), in November, making the nation's fourth-largest TL broker a stand-alone company.

RXO's asset-light platform, which also includes managed transportation, freight forwarding and last-mile offerings, generates more than $5 billion in annual revenue. The company's brokerage unit connects shippers to a network of approximately 100,000 carriers and over 1.5 million trucks in North America.

XPO sold an intermodal business in March and spun off its contract logistics business, GXO (NYSE: GXO), last year.

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The last piece of the strategy included the sale of a $3 billion European transportation business, making the remaining XPO a pure-play less-than-truckload carrier. However, that divestiture was pulled in early December due to the deterioration in European capital markets as macroeconomic uncertainties have slowed deal flow.

XPO's management still believes capacity, tech and service investments in the LTL segment will allow the company to hit previously provided long-term financial targets.

STG Logistics vertically integrated its containerized logistics portfolio by acquiring XPO's intermodal unit. The $1.3 billion March deal onboarded a considerable amount of equipment helping to minimize STG's reliance on third-party providers of drayage and intermodal capacity.

The transaction included 48 locations, 11,000 containers, 2,200 tractors (owner-operators) and 5,200 chassis. The unit generated $1.2 billion in revenue during 2021 performing mostly intermodal drayage and rail brokerage services. Now STG boasts a port-to-door logistics offering for containerized goods.

STG is now the top port drayage provider with transload capabilities in every major port in the U.S., and the fourth-largest asset-based intermodal marketing company. It has more than 2,700 trucks and 15,000 containers in the network, generating more than $2 billion in revenue and $250 million in EBITDA.

As part of the deal, STG was recapitalized by Wind Point Partners, which acquired it 2016, and funds from Oaktree Capital Management. The two private equity firms are now equal partners in STG.

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XPO netted cash proceeds of approximately $710 million.

Werner Enterprises (WERN: NASDAQ) stayed on the M&A hunt in 2022. Acquisitions were not part of the carrier's capital deployment strategy in its first 66 years of existence. However, under new leadership it has executed two deals in each of the past two years.

The company added 200 trucks and 980 trailers to its one-way operation in October by acquiring Baylor Trucking. Baylor operates out of two terminals in the eastern and southern parts of the central U.S. Financial terms of the transaction were not disclosed, but the carrier was generating annual revenue of $81.5 million at the time, which is not overly impactful to Werner's $2.4 billion TL platform.

However, less than a month later, Werner made a big addition to its logistics platform by acquiring ReedTMS Logistics for $112 million.

ReedTMS is a midsize TL and freight broker boasting a platform of 70,000 carriers, generating $372 million in revenue. The deal also included a temperature-controlled asset-based fleet with 130 trucks and 775 trailers, which accounts for only 10% of total revenue.

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The addition of ReedTMS to Werner's logistics unit pushes the division's revenue to more than $1.1 billion.

Both of Werner's 2022 deals are expected to be accretive to earnings in year one.

One of the biggest temperature-controlled fleets in the nation was formed when Hirschbach announced in February it was buying John Christner Trucking (JCT). Financial terms of the transaction were not disclosed, but the combined entity includes more than 3,000 trucks, 5,000 trailers and $1 billion in revenue.

JCT's fleet of 800 tractors runs primarily on the West Coast and from coast to coast in the South, which fits nicely with Hirschbach's mostly east of the Rocky Mountains operations. JCT's $350 million in annual revenue also included a $150 million brokerage operation.

The deal gave Hirschbach a logistics platform, and JCT has been able to access Hirschbach's dedicated offering and large trailer pools.

A.P. Moller – Maersk (MAERB.C.EB) continued to gobble up U.S. assets, acquiring Pilot Freight Services, the second-largest residential big and bulky delivery company in the U.S.

Pilot provides first-, middle- and final-mile transportation out of 87 facilities throughout North America using an asset-light network of third-party TL and LTL providers. The company also provides managed transportation services for expedited freight.

The $1.8 billion deal valued Pilot at roughly 13 times forward EBITDA. Pilot was generating $1.5 billion in revenue at the time of the February deal announcement.

The transaction was one of several that have allowed Maersk to transform from its roots as a shipping line into a global logistics provider with U.S. domestic land-based offerings. Prior deals included the acquisitions of warehousing and distribution company Performance Team and e-commerce fulfillment provider Visible SCM. Maersk now has more than 150 facilities in the U.S.

More FreightWaves articles by Todd Maiden

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