Big M&A deals are starting to roll in for the publicly traded truckload carriers. After months of management teams saying they would look to deploy their strengthening balance sheets on accretive acquisitions, the fruit is finally shaking loose from the tree.
Less than a week after Werner Enterprises (NASDAQ: WERN) announced it had acquired a couple of regional carriers in a $142 million deal with ECM Transport, the nation’s largest TL carrier Knight-Swift Transportation (NYSE: KNX) made a big splash Tuesday, acquiring less-than-truckload carrier AAA Cooper Transportation in a $1.35 billion deal.
Knight-Swift adds LTL to its lineup
The deal represents a big divergence for Knight-Swift, which generates nearly $5 billion in annual revenue from its trucking, logistics and intermodal segments, of which TL represented 80%. Following the transaction, Knight-Swift’s core TL business will only account for 63% of consolidated revenue.
The acquisition of Dothan, Alabama-based AAA Cooper gives Knight-Swift an immediate footing in the more than $40 billion LTL market. 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.
AAA Cooper is expected to record $780 million in revenue during 2021 and post an operating ratio near 90%. At a 2021 run rate of $140 million in earnings before interest, taxes, depreciation and amortization (EBITDA), Knight-Swift acquired the company and its fleet of 3,000 tractors and 7,000 trailers for less than 10x EBITDA.
AAA Cooper will operate as a stand-alone division of Knight-Swift with current CEO Reid Dove remaining in place. Dove was also appointed to Knight-Swift’s board.
On a conference call with analysts, Knight-Swift management said AAA Cooper is expected to be a high-single-digit growth outlet moving forward, immediately accretive to adjusted earnings per share (13 cents in the second half of 2021 and 29 cents in 2022 excluding the impact of synergies).
Knight-Swift’s current consensus EPS estimates are $3.59 and $3.66 in 2021 and 2022, respectively.
“We’ve been very deliberate, even patient, to find the right kind of transaction, the right kind of businesses that fit our model,” said CEO Dave Jackson. “We’ve been preparing for a transaction such as this. We’re already preparing for the next transaction.”
|$1.35B enterprise value|
|Combined value||~$9B enterprise value|
|Target revenue run rate||$780M|
|Acquirer revenue run rate||$4.7B|
|Expected cost synergies||TBA|
|Earnings expectations/accretion||$0.13 in H2/21, $0.29 in 2022|
|Recent acquisitions by acquirer||UTXL, Eleos, Abilene Motor Express, Swift Transportation|
|Financing||debt, cash, stock|
Analysts see deal as ‘transformational’
While not overly needle-moving to near-term results (roughly 14% of total revenue and 11% of operating income), “this is big,” Deutsche Bank (NYSE: DB) analyst Amit Mehrotra told clients in a note on Tuesday.
“The transformational aspect for us is the company’s clear indication of entering, and growing, its LTL presence, which in our view changes the cyclical narrative associated with the company’s Truckload business. This will not happen overnight, but today’s announcement is a significant step in the right direction, in our view,” Mehrotra said.
He sees opportunities for Knight-Swift to cross sell its other three offerings as LTL carriers usually have a much larger customer book than TL carriers. “We also see benefits on driver recruitment and retention, as KNX can now offer a career path for TL drivers (moving to LTL which requires more experience and gets drivers home more regularly),” Mehrotra added.
UBS (NYSE: UBS) transportation analyst Tom Wadewitz said the deal multiple was “very reasonable” at sub-10x EBITDA. He noted differences in the regional carrier to the national carriers he follows, but views the valuation as compelling when compared to that group, which trades closer to 15x enterprise value-to-EBITDA.
He 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,” Wadewitz stated.
AAA Cooper’s OR and service performance metrics show it as more of a middle-of-the-pack performer. However, this is an area management believes can be improved to the mid-80% range over the next three years.
The company and management team have a track record of 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, ending 2020 with an OR 80 basis points better at 80.7% on an adjusted basis.
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.
The AAA Cooper transaction was funded with $1.3 billion in cash, which came from a new $1.2 billion term loan and existing liquidity, $10 million in Knight-Swift stock and the assumption of $40 million in debt. Knight-Swift’s debt leverage moves to 1.44x following the transaction, up from 0.54x prior but only slightly higher than the 1.24x level that followed the Swift merger.
“We are positioning ourselves to be a provider that can provide tremendous value to a supply chain,” said Jackson. “To not just look at things within the walls or silos that the industries kind of operate but we can look to try and create efficiencies for customers that work for us and that work for them as well”
New investment dollars continue to flow into LTL space
In January, Canadian trucking and logistics provider TFI International (NYSE: TFII) announced it was acquiring UPS Freight (NYSE: UPS), now TForce Freight, in an $800 million transaction. TFI is now in the process of integrating the unit. Part of those initiatives includes repricing nearly $3 billion in freight, much of which was tied to bundled services contracts with clients that were priced at below-market LTL rates.
Downers Grove, Illinois-based Roadrunner (OTC: RRTS) announced in March it closed a $50 million private placement with proceeds to be used for technology investments to improve its LTL offering. The company has been involved in a turnaround aimed at unwinding years of non-LTL, asset-heavy acquisitions. The company’s goal is to create a less capital-intensive structure focused primarily on LTL.
Forward Air (NASDAQ: FWRD) has been increasing its exposure to LTL for a year now. The Greeneville, Tennessee-based asset-light trucking and logistics company’s growth strategy has focused on building out its intermodal and final-mile offerings, in addition to increasing LTL service outside of its legacy airport-to-airport network. The company’s focus on LTL received a nudge when an activist investor group pressed the issue during a recent proxy battle.
Those not involved in M&A like Old Dominion Freight Line (NASDAQ: ODFL) and Saia (NASDAQ: SAIA) have capitalized on their past success by continuing to invest in their networks through terminal additions and technology upgrades. These carriers continue to benefit from the flywheel effect as improving ORs fuel increased cash flows, which are reinvested in the business, driving ORs lower and returns higher.