Forward Air’s chief said Wednesday that customers are “still entrusting us with their business” following a controversial merger announcement that will shake up part of the competitive landscape in domestic forwarding.
The asset-light transportation provider announced last month that it had entered into an agreement to acquire forwarder Omni Logistics, essentially allowing it to remove the middleman from the equation. However, that “middleman” has been Forward’s primary customer for decades and the move threatens to blur the lines of its relationship with the forwarding community moving forward.
For years Forward Air (NASDAQ: FWRD) was largely thought of as a linehaul capacity provider to forwarders seeking delivery options for their freight. The company’s legacy business moves airfreight between airports in North America on the ground in a less-than-truckload arrangement. The acquisition of Omni — a forwarder and customer of Forward’s — has some of its other forwarding customers questioning the competitive dynamics of the new arrangement.
“It’s been a tough and very sensitive time with our domestic forwarder customers,” Forward Chairman, President and CEO Tom Schmitt told investors at the 2023 Jefferies Industrials Conference. He referred to this segment of the market as a “co-opetition,” noting that some of its forwarding clients have established or acquired their own mini-linehaul networks in recent years.
Forward has vowed to maintain “confidentiality and neutrality” by segregating sales forces, with one serving its current domestic forwarding customers and another that sells directly to shippers. He referred to the strategy as “an and, not an or” and said pricing and data sets will be siloed. Some of Forward’s existing customers previously voiced concerns with the merger announcement, saying their account lists and shipment details would be made available to Omni.
“Frankly, it’s going to be earned trust,” Schmitt continued. “As long as we make sure that that separate sales force still [gives] the best service, gives them every chance to keep and win business, gets them the best rates, then we just need to win together.”
He said management has talked with all of Forward’s large domestic forwarding customers, which agreed “they’re going to be working with us as long as we make them win more business.”
Management reiterates highlights of transaction
The deal will double the size of Forward Air, pushing annual revenue to $3.7 billion and adjusted earnings before interest, taxes, depreciation and amortization to more than $600 million. Schmitt said the combination allows it to better compete in the $15 billion expedited LTL market, roughly half of which is conducted directly between shipper and carrier while the other half is originated through intermediaries.
Forward currently has a $1 billion share of that premium LTL market, half of which comes from domestic forwarders.
Omni has $300 million in LTL revenue, with $250 million being fulfilled by other capacity providers. Much of that freight is likely to be converted to Forward’s network within the first 60 to 90 days of closing, Schmitt said.
He said direct selling will allow it to generate 20%-plus operating margins by combining the 10% to 12% margin Omni generates on the forwarding side with the 15%-plus margin Forward generates handling the freight.
“Now we have a way to actually tap into both halves equally powerfully,” Schmitt said.
In total, Forward has guided cost and revenue synergies to equal $125 million in adjusted EBITDA by the end of 2025. The first $60 million is expected to be accomplished in the first six months. The plan is to fold many of Omni’s 26 terminals and more than 30 large lanes into Forward’s existing network. Schmitt compared the process to the success it had removing redundancy following its acquisition of Land Air Express earlier this year.
The company also cautioned that the revenue guidance is dependent on a “macro uplift” moving into 2024, a mix shift to favor a higher percentage of LTL revenue and the retention of accounts recently onboarded by three new sales hires in July.
Forward taking on load of debt to fund deal
The cash-and-stock transaction was inked at a $3.2 billion enterprise value. Forward will pay just $150 million in cash with the remainder consisting of a 38% stake in Forward’s equity and the assumption of Omni’s $1.4 billion in debt. However, the shares that will be issued are fixed and not set to a certain price. Given the 37% sell-off in the stock since the deal was announced, the price tag is down to $2.6 billion currently.
The current purchase price is 14x EBITDA excluding synergies and 9x EBITDA including the full $125 million in deal synergies, levels that have been viewed as lofty. Also, earnings have declined in the first half of the year potentially stretching the multiples further.
At the time the announcement was made, the deal was struck at 18x trailing 12 months’ EBITDA (without synergies).
The debt load pushes Forward’s leverage to nearly four times EBITDA (without any synergies) at closing. However, the company said cash flow generation is expected to be material and noted that the combined entity only requires annual capex of 2% of revenue. The plan is to deleverage to 2.7x in 2024 and to under 2x in 2025.
On the overall economy Schmitt said, “It is getting better but there is a good chance that the freight recession will be followed by an overall recession.”
He said Yellow’s departure has helped with volumes and is allowing carriers throughout the industry to take pricing higher. Forward expects to see the general rate increase it implemented in February stick better in the second half of the year than it did in the first half.
“There’s literally billions … of business, high-value freight sold directly and sold indirectly,” Schmitt said. “We should be absolutely the top player in both of those halves.”
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