M&A Update for Transportation Industry

February 8, 2017|Corey Vanderpoel

It has been a notable past few years for middle-market M&A transactions, evidenced by premium pricing and above-average deal volumes. In the third quarter of 2016, valuations of transactions less than $250 million in Total Enterprise Value (TEV) averaged 7.0x EBITDA1, a consistent increase since 2011. 

Total Enterprise Value (TEV)/EBITDA1

TEV ’03-11 ’12 ’13 ’14 ’15 YTD’16 Total
10-25 5.6 5.8 6.0 5.6 5.8 6.0 5.7
25-50 6.2 6.2 6.8 6.6 6.6 6.5 6.3
50-100 6.8 6.7 6.8 8.4 7.8 7.6 7.0
100-250 7.3 7.4 7.5 7.8 9.0 8.9 7.7
Total 6.2 6.3 6.5 6.7 6.7 7.0 6.3

What’s driving increases in M&A volume and pricing?

  • Buyers are aggressively looking for growth, since organic growth can be challenging
  • Substantial cash has been accumulated since the recession and is available to be deployed
  • Senior debt multiples across all industries has jumped to 3.2x EBITDA, more than a 30% increase since 20131
  • The number of active private equity firms globally has increased 138% since 2000 to approximately 3,464 firms2

While the statistics herein are averages, it should be understood that varying companies, buyers and industries can bring about a wide range of values. Ultimately, buyers are paying for certainty, and the more comfort the buyer has in this regard directly impacts pricing. For example, a company with 75% customer concentration presents greater risk and is generally valued notably less than another company with a diversified customer base, all else being equal. Similarly, different buyers or buyer types could value a company differently, whether synergistic (e.g. introduction to new customers or services) or financial (e.g. sustainable cash flow) interest. Lastly, the industry in which a company operates plays a significant factor in the overall interest in and valuation of a company.

Transportation and logistics M&A market

The transportation and logistics industry has and continues to be highly fragmented with many owners searching for greater scale to gain efficiencies or to optimize routes and spread fixed costs (and investment in technology) across a broader base of operations. Acquisition strategies in the industry have often revolved around expanding services, diversifying customers or expanding geography. For example, Roadrunner Transportation Systems, Inc., headquartered in Milwaukee, Wisconsin, has made more than 20 acquisitions since 2011 to expand its comprehensive suite of global supply chain solutions to include truckload logistics, customized and expedited less-than-truckload, intermodal solutions, freight consolidation, inventory management, expedited services, air freight, international freight forwarding, customs brokerage and transportation management solutions. In its 2015 annual report, the company noted that it has evolved its acquisition growth model to focus more on organic growth, an indication that M&A interest is not necessarily based on the market, but rather based more on a company’s specific objectives.

Pricing in the transportation and logistics industry, according to GF Data®, which accumulates data on private equity group transactions, trails the overall M&A market by 6.3% at 5.9x EBITDA for transactions less than $250 million in TEV. This discount is likely the result of certain industry dynamics, such as competition, lack of differentiation, low barriers to entry and cyclicality. Consistent with the overall market, smaller transactions present a significant discount compared to larger transactions.

Transportation and Logistics TEV/EBITDA

TEV Range TEV / EBITDA
10-25 5.2
25-50 5.6
50-250 6.7
Total 5.9

In the current M&A market, most transactions are driven by certain macro-economic, regulatory and demographic conditions. Accordingly, we’re projecting continued growth in the transportation and logistics M&A market driven by:

  • Companies looking to acquire to:
    • Leverage economies of scale to preserve profitability
    • Hire drivers in a tight labor market with increased hiring costs
    • Exploit domestic economies poised for growth
    • Expand capabilities (and differentiate) into services leveraging logistics or technology
    • Consider various asset models to free up capital and invest in efficient and reliable equipment
  • Companies looking to sell because:
    • Owner(s) in the baby-boom generation with no succession plan (primarily companies with less than $50 million in sales)
      • Or owner(s) looking to take advantage of a strong overall M&A market
    • Capacity constraints due to a shortage of drivers led by a tight labor market, rising driver ages and increasing costs to hire
    • Concerns with absorbing industry regulations around safety and driver hour limits
      • With the Federal Motor Carrier Safety Administration’s Electronic Logging Device (ELD) rule set to take effect December 18, 2017 (with phased implementation), some smaller carriers are finding it difficult to meet the capital, administrative and compliance requirements or are expecting to realize a reduction in fleet productivity. Therefore, certain smaller companies could consider transitioning ownership to an entity more prepared to handle the added regulation.

Whether the deal is led by an aggressive acquirer or an ownership group looking to exit, it is believed that M&A in the transportation and logistics industry will continue for the foreseeable future. And for buyers and sellers alike, timing is suitable as the economy is experiencing steady growth, interest rates remain at historically low levels (although rising), and capital is widely available. Finally, provided it commonly takes six to nine months to transact a business, now might be an appropriate time to consider your future plans and objectives, whether buying or selling.

Our team can help you to understand your specific options. Contact Corey Vanderpoel at 414-465-5607 or cv@taureaugroup.com to learn more.

1 Source: GF Data®. Information included from GF Data may not be used or re-published without permission from GF Data or Taureau Group.

2 Source: PitchBook Data