M&A activity rolls along in the trucking industry

Weekly Corporate Growth Report, May 20, 2002 by Bailey, John

The trucking industry is ripe for M&A activity. The industry is fragmented with more than 450,000 carriers, with only 12 of these carriers generating revenues exceeding $1 billion. The majority of truckload carriers, almost 300,000 companies or some 60 percent, operate fewer than 100 trucks. Small truckers are more vulnerable to the adverse economic factors that have impacted the industry in recent years, like overcapacity, rate wars, chronic driver shortages, high fuel prices, and being in a highly cyclical industry, subject to losses when the economy is slowing down.

Thousands of small to mid-sized truckers have had to make the choice to either close or merge in recent years, with bankruptcies increasing from 1,200 in 1999, to 3,670 in 2000, to 4,280 in 2001. Robert Costello, chief economist of the American Trucking Association points to the grim reality in the industry, "The trucking slowdown began in early 2000. Since then there have been some gains but only at the expense of industry consolidation as more than 3,000 mostly small truckload carriers have left the marketplace in the last two years." For most small trucking firms, merging is preferred to closing.

Mergers and acquisitions among small-cap transportation companies over the last six years, as reflected by DoneDeals, show that price multiples have fallen off since the late 1990's and stabilized at 1.0-1.2 for Price/Assets, 0.5-0.9 for Price/Revenue, and near 13.5 for Price/Earnings.

Driving M&A activity and consolidation in the trucking industry, as with the airlines, has been the pressing need to reduce costs to match falling, or at best stable prices, caused in turn by overbuilt capacity. Industry capacity is becoming more rational as small marginal operators are being forced out of business or being taken over by the larger more efficient survivors. Barriers to entry in the form of technological efficiencies are rising in an industry where not long ago a hard driving man and his rig faced almost no barriers to entry. The drive to reduce costs is so paramount that Traffic World predicted in March 2002 that large shippers were expecting to drive down trucking rates further by paying Mexican drivers a fraction of U.S. drivers as soon as the long-awaited inspection infrastructure is completed along the U.S-Mexican border only a few months away.

Outlook

For a trucking industry that saw its revenues fall by almost 10% in 2001 from $16.4 billion to $14.7 billion and its bottom line net profit margin cut in half from 2.6% to 1.3%, the outlook is a dim light at the end of a tunnel. Fleet Owner reported in its February 2002 issue that "just as this recession was milder than most, the recovery is likely to be unusually anemic as well." The good news, says John Smith, CEO of CRST, a major truckload carrier, is that "trucking will see the economy recover several months before the rest of the country. We'll see it first. We always have. When inventory needs to be replenished, we'll haul it." Further consolidation due to failing businesses and fleet acquisitions are likely to continue until the trucking industry reaches the end of the tunnel.

By John Bailey

Contributing Editor