ArcBest (NASDAQ: ARCB) took a big step toward bridging the gap to a long-term goal Wednesday with the acquisition of Chicago-based truckload broker MoLo Solutions. The deal advances a key initiative for the Fort Smith, Arkansas-based logistics and less-than-truckload provider — to grow its asset-light operations to a level equal to its asset-based trucking unit.
MoLo’s $600 million in expected revenue for 2021 pushes ArcBest’s consolidated annual top line to $4.1 billion, with asset-light revenue now accounting for 44% of total revenue.
The remaining gap could be closed in short order as MoLo has been one of the fastest-growing privately held companies in transportation and logistics. Since its 2017 start when it generated just a few million in bookings, the company closed 2020 with $274 million in revenue. The broker will likely ride a hot freight market to a level more than double that this year.
Upfront cost could be rivaled by multiyear earnout
ArcBest will pay $235 million in an upfront cash payment to execute the acquisition. Potential payments after that could exceed the initial amount.
The deal includes an earnout provision based on adjusted EBITDA targets of $25 million in 2023, $33 million in 2024 and $44 million in 2025. No earnout will be paid in 2022.
Hitting 100% of those targets would result in a cumulative earnout of $215 million, for a total purchase price of $450 million. At 80% of the targets, the total deal value is $330 million, while eclipsing the target by 300% pushes the acquisition price to $690 million.
ArcBest management said MoLo was operating breakeven on the EBIT and EBITDA lines, excluding acquisition-related amortization expense. However, the company is expected to exit the fourth quarter of 2022 generating $25 million in adjusted EBITDA with the deal being accretive to earnings after one full year of ownership.
| Acquisition price | $235 million upfront, $450 million at 100% of earnout targets |
| MoLo’s revenue run rate | $600 million in 2021 |
| ArcBest’s revenue run rate (pro forma through Q2/21) | $4.1 billion |
| Previous ArcBest acquisitions | Panther Expedited Services, Logistics & Distribution Services, Bear Transportation Services, Smart Lines Transportation Group |
| Financing | cash |
ArcBest’s logistics segment, which includes brokerage, operated at an adjusted operating margin of 3.2% through the first half of 2021. Management said the reason for MoLo’s margin lag had to do with incremental costs associated with its rapid growth as well as gross margin headwinds.
MoLo generates 50% to 60% of its revenue from contractual brokerage agreements. Contract prices have yet to catch up to spot rates, which continue to move higher. MoLo, like many brokers operating under contract, is paying an elevated rate for truck capacity relative to its contract terms.
By comparison, ArcBest’s brokerage segment conducts mostly spot transactions, with only 10% to 20% of brokered loads coming from contractual agreements.
Brokerage shops remain hot M&A targets
Buyers have honed in on the 3PL and brokerage markets in recent months, putting money to work through acquisitions.
Assuming MoLo operates as expected, at 100% of the target, the deal price is just north of 10x adjusted 2025 EBITDA.
By comparison, freight brokerage Echo Global Logistics (NASDAQ: ECHO) was taken private in a $1.3 billion deal in early September. The acquisition price was slightly more than 11x trailing 12 months’ adjusted EBITDA. Uber Freight’s (NYSE: UBER) July acquisition of Transplace came in at more than 20x EBITDA.
Post-transaction, ArcBest’s balance sheet will still have $188 million in cash and net debt of $50 million. Its debt leverage will remain less than one turn of EBITDAR. The company will still be in position to return cash ($227 million in free cash flow for the 12 months ended June 30) to shareholders through dividends and share repurchases.
Management highlights synergies from the deal
The deal will make ArcBest a top-15 truck broker in the U.S. with combined brokerage revenue of $1.2 billion. It will also double ArcBest’s platform to include 70,000 carriers.
MoLo is a traditional TL broker, with digital capabilities. The company has achieved its current revenue level with a customer book of just 500 shippers, which provides ample cross-sell opportunities as ArcBest currently serves 30,000 shippers.
Also, its clients are often looking for other capacity solutions, including LTL and managed transportation, a place where ArcBest provides depth.
Management also likes the expertise and data the deal brings.
“We have $3 billion of opportunity within ArcBest’s most loyal customers for buying logistics solutions and a lot of that is truckload,” said Judy McReynolds, ArcBest chairman, president and CEO. “These are relationships that we’ve already invested in. With the advancement of our digital tools, the data and information and knowledge that we gain, and again the ability to better serve customers that we already know something about that are more value based, we feel like we’re going to be in a good place.”
ArcBest will consolidate the two brokerage platforms into one and plans to lean on the father-son relationship between MoLo’s CEO, Andrew Silver, and his father, Jeff Silver, who runs Mastery Logistics Systems (Mastery). MoLo’s current platform is built around its cloud-based TMS MasterMind.
“We wouldn’t do this transaction if it wasn’t going to be accretive to us and to improve our returns,” McReynolds continued. “We see that happening and the synergies really sit on top of that.”
The deal is expected to close in the fourth quarter subject to customary closing conditions.
Stephens Inc. acted as ArcBest’s financial adviser with J.P. Morgan (NYSE: JPM) advising MoLo.
Third-quarter update shows LTL upside surprise
A separate filing with the Securities and Exchange Commission showed ArcBest is on track to achieve another long-term goal: a low-90% operating ratio in its asset-based segment.
Asset-based revenue, which includes LTL operations, increased 20% year-over-year as tonnage increased 2% and revenue per hundredweight was up 18% inclusive of fuel surcharges. The implied year-over-year revenue growth rate in September represents an acceleration from August.
Weight per shipment, often an indicator of margin improvement, was up 2% from last year.
ArcBest normally records a flat operating ratio from the second to third quarters each year. However, the company saw a 200-basis-point improvement this year, notably due to improved yields. The third quarter result now has the LTL segment operating at an 89.6% OR through the first nine months of the year, a 600-bp improvement over the last five years.
McReynolds said, “We still have more to go,” referring to LTL margins and the expectation that the MoLo acquisition will help drive further LTL demand and asset utilization.
Asset-light revenue was up 37% year-over-year in the third quarter but purchased transportation expense moved 110 bps higher as a percentage of revenue.
Shares of ARCB finished Thursday’s session up 6.5% compared to the S&P 500, which was down 1.2%.
