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Q3 2015 Transportation & Logistics TRANSPORTATION & LOGISTICS Q3 2015 CONTACTS STATE OF THE TRANSPORATION M&A MARKET Experts continue to view the Transportation & Logistics industry as a measure of the health of the Len Batsevitsky overall economy and thus far, 2015 has been a strong year for providers of commercial Director transport. The industry has been aided by significantly lower oil prices, increased personal (617) 619-3365 [email protected] consumption, expanded manufacturing and the continued rise of e-commerce as a viable retail channel. As a result, many transportation companies are experiencing improved financial Daniel Schultz performance which, coupled with a robust middle market M&A environment, has led to a Director of Business Development significant increase in deal activity. Furthermore, the industry’s high fragmentation will serve to (617) 619-3368 increase M&A activity as companies look to consolidate, increasing their efficiency through scale. [email protected] Overall, 2015 is shaping up to be a strong M&A year for the Transportation & Logistics industry Matthew Person because thus far through Q4, there have been 104 transactions. If that pace continues Associate (617) 619-3322 throughout the rest of calendar year, we could see nearly 140 M&A transactions during 2015, [email protected] which would near the record breaking high of 144 transactions in 2012. Transportation and Logistics Transactions 160 144 140 113 120 108 108 104 100 80 80 60 40 20 0 BOSTON 2010 2011 2012 2013 2014 YTD CHICAGO 9/30/2015 Sources: Capital IQ and Capstone Partners LLC research LONDON LOS ANGELES In addition, valuations have remained stable over the past several years with recent transaction PHILADELPHIA multiples for asset-light logistics businesses generally north of 8x LTM EBITDA, while traditional SAN DIEGO asset-heavy freight carriers (primarily in the trucking sub-industry) have traded at a range of 5x to 7x. Public transportation and logistics providers are currently trading at approximate valuations SILICON VALLEY of 6x for trucking companies, 10x for marine transport, 8x for air freight providers, 9x for rail TAMPA transport companies and 10x or above for dedicated logistics businesses. Values should remain predominantly steady in the near-term as market conditions remain favorable. Transportation & Logistics Q3 2015 MARKET TRENDS Trucking and Logistics Dominate Sector Activity: Trucking provider transactions (33%) “The impetus for much and Logistics provider transactions (41%) accounted for nearly three quarters of all of the deal activity has M&A transaction activity (by deal volume) in the Transportation & Logistics industry been driven by the need for the nine-month YTD period that ended on 9/30/2015. As historically fragmented for providers to increase sub-sectors, the impetus for much deal activity has been driven by the need for providers to increase capacity, expand product offerings and increase the efficiency of capacity, expand their operations through a combination of scale and utilization of acquired technology. product offerings and The rail and marine subsectors each accounted for nearly 13% of M&A deal volume increase the efficiency of during the same period. their operations.” Financial Investor Activity Increases: Financial acquirers have played an increasingly - Len Batsevitsky important role in the Transportation & Logistics industry as they account for nearly Director, Transportation 15% of buyers/investors thus far in 2015, compared to just 11% in 2014. Financial & Logistics Team buyers have been especially aggressive in securing non-core assets divested by companies. Most of these players have been executing a buy-and-build strategy by aggregating multiple asset types with various geographic footprints and service offerings to build critical mass and achieve scale. As commercial debt continues to be extremely cost effective and readily available, financial investors are expected to remain highly competitive in their acquisition strategies and will continue to make up a larger percentage of transportation acquirers. Large Transactions Prevalent: Thus far, 2015 has had its share of megadeals within the Transportation & Logistics industry. The largest of these deals was FedEx Corporation’s $4.8 billion offer in April to purchase Netherlands-based express carrier TNT Express N.V., an acquisition that is expected to make FedEx one of the largest package delivery providers in Europe (rivaling UPS for the top spot). Other megadeals included XPO Logistics’ $3.5 billion acquisition of Con-way Inc. in September, the $1.8 billion purchase of Coyote Logistics by UPS in July, XPO’s $3.5 billion purchase of French trucker Norbert Dentressangle SA in June and Kintetsu World Express’ $1.2 billion acquisition of APL Logistics in May. Rise in International/Cross-border Buyers: So far in 2015, 25% of acquirers have been international, which is significantly higher than the 18% of total Transportation & Logistics acquirers in 2014. Despite the relative strength of the US dollar, cash-rich foreign buyers have sought to secure domestic transportation & logistics businesses in order to diversify revenue streams and end markets, expand service or technological capabilities, or gain a foothold in an attractive and growing US market. Capstone Partners LLC 2 Transportation & Logistics Q3 2015 GROWTH DRIVERS The M&A market for transportation and logistics providers appear both bright and sustainable due to several important dynamics. We have identified some of the key factors driving transactions below. “The rise of E-commerce is causing carriers to E-Commerce Growth: E-commerce has had a significant impact on the drastically reconfigure Transportation & Logistics sector over the last few years as the increased rate of their delivery online purchases has continued to put pressure on the transportation networks of methodologies and has put last mile delivery providers. In short, consumers are increasingly demanding faster a greater emphasis on delivery times for their orders, yet remain unwilling to pay for expedited services. leveraging technology to While regional distribution centers have helped cut delivery costs by decreasing length of haul, they have also reduced asset efficiency. The rise of E-commerce is improve efficiency.” causing carriers to drastically reconfigure their delivery methodologies, leverage new technology and utilize outsourced logistics providers if capabilities are not available - Len Batsevitsky in-house. Director, Transportation & Logistics Team Tons of Tonnage: Despite declining rail coal traffic, truck and rail tonnage has increased significantly over the last few years. The truck tonnage index reached its all-time high in January 2015 and has remained near record levels since. In July, the truck tonnage index was 3.7% higher as compared to the same period in 2014, boosted by increased retail sales, factory output and housing starts. The continued demand has strained carriers who are looking for strategic acquisitions to augment their capacity. Marine Shipping Sustainability: While marine shipping remains stagnant, tightening regulations and exposure to potential rising crude oil prices have ramped up M&A activity amongst companies with clean shipping technology. Interest has been strong for companies with sulfur oxide “scrubbers” that mitigate the impact of the bunker fuel byproduct. Yara International acquired a controlling stake in Green Tech Marine last year after rumors swirled over Rolls Royce’s potential takeover of market leader Wartsila. M&A activity around “green” shipping technology should remain strong as operators look to reduce costs and comply with environmental regulations. Driver Shortage: According to the American Trucking Associations, there is a current shortage of roughly 25,000 qualified truck drivers, in part due to an aging driver force, which has reduced truckload capacity to the tightest it has been in a decade. In addition, limits on the amount of hours that drivers can consecutively work is putting pressure on the supply of available trucks. With decreased supply and increased consumer demand, trucking prices are projected to increase upwards of 5%, according to some estimates. Look for trucking companies to acquire local/regional providers to augment their transportation networks. Additionally, many carriers that are having difficulty finding qualified drivers are expanding the capacity of their trucking fleets by adding incremental trailers to existing trucks. Capstone Partners LLC 3 Transportation & Logistics Q3 2015 SELECTED DEAL BRIEFS XPO Logistics acquires Con-Way Inc. (September 2015) XPO Logistics (NYSE:XPO) $3.5B acquisition of trucking company Con-Way Inc. puts the transportation and logistics provider firmly in the trucking business in the US, moving the company from primarily middleman services to one that now will generate approximately one-third of its revenue from hard assets. This acquisition runs contrary to the supposed competitive advantage asset-light companies have in operating flexibility and mitigated exposure to fixed costs. Yet, XPO CEO Bradley Jacobs said that in operating its own fleet, the Company can chase bigger contracts with shippers whom prefer to work directly with carriers. The acquisition is part of a sequence of transactions XPO has completed in 2015. Absolute Worldwide Logistics acquires shipmymachinery.com (September 2015) Global freight forwarder and third party logistics provider Absolute Worldwide Logistics enhanced its lead
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