Knight-Swift Transportation’s latest acquisition is a bit of a reversal from recent initiatives, which were designed to dilute some of the cyclicality inherent in being an over-the-road truckload carrier. Those actions included acquiring less-than-truckload assets and building out a power-only brokerage offering.
On Tuesday, Knight-Swift (NYSE: KNX), the nation’s largest TL carrier, announced it will acquire fellow top-10 TL carrier U.S. Xpress (NYSE: USX) in an $808 million transaction.
What about the next piece of the LTL puzzle?
Many investors and analysts assumed the company’s next announcement would include another piece of what will eventually become a national LTL network.
In 2021, Knight-Swift surprised the industry with the acquisition of not one but two LTL carriers. In July of that year, it acquired AAA Cooper Transportation and its roughly 70 terminals located in the Southeast and Midwest in a $1.35 billion deal. A few months later it purchased Midwest Motor Express and its 33 facilities in the Upper Midwest and Northwest for $150 million. The two LTL carriers generated $867 million in revenue (excluding fuel surcharges) last year.
The next deal presumably would have landed Knight-Swift an LTL carrier somewhere in the Northeast or Southwest to fill in the map.
That said, the addition of U.S. Xpress will not impede Knight-Swift’s LTL build-out ambitions.
“This transaction will not slow down the geographic expansion of our LTL network or our other growth initiatives, as our financial and other resources remain significant,” Knight-Swift CEO Dave Jackson stated in a news release.
Also, the company’s revenue mix won’t be all that skewed following the deal. Knight-Swift’s truckload business will represent 63% of total revenue, compared to 58% prior to the transaction.
Cash flows, balance sheet still well positioned for M&A
The deal will push Knight-Swift’s net debt leverage to 1.7x adjusted earnings before interest, taxes, depreciation and amortization. The company has generated between $1.2 billion and $1.4 billion in cash flow from operations over the past two years with free cash flow of $819 million in 2022 and $908 million during the 2021 cycle peak.
An accompanying slide deck showed the company will have $800 million in unrestricted cash and liquidity after the close, meaning it still has the dry powder to acquire other targets. And that’s before expected cost and operating synergies at U.S. Xpress take hold, which could happen quickly based on Knight-Swift’s M&A credentials.
“Acquisitions in the LTL area and the build out of a national LTL network remains a strategic priority for KNX,” UBS (NYSE: UBS) transportation analyst Tom Wadewitz told investors following the deal announcement. “The USX deal boosts KNX’s net leverage to around 1.7x, but we believe KNX still has balance sheet capacity which would allow them to do an LTL acquisition in 2023 as they could go to 2x leverage or modestly higher.”
Over the past three years, Knight-Swift has returned $733 million to investors in the form of share repurchases and dividends, in addition to the $1.5 billion spent on LTL acquisitions.
| Acquisition price | $808M enterprise value |
| Combined value | ~$11B enterprise value |
| U.S. Xpress revenue run rate | $2.2B |
| Knight-Swift revenue run rate | $7.4B |
| Expected cost synergies | TBA |
| Earnings accretion | accretive to EPS starting in 2024, $1-plus in EPS by 2026 |
| Recent acquisitions by Knight-Swift | Midwest Motor Express, AAA Cooper, UTXL, Eleos, Abilene Motor Express, Swift Transportation |
| Financing | debt and cash |
Knight-Swift has proven track record of turning around struggling carriers
In 2017, Knight Transportation took on the challenge of correcting the course of highly leveraged, underperforming Swift Transportation. The $6 billion merger of the two carriers created the largest fleet in the nation at the time with 23,000 tractors, 77,000 trailers and 28,000 employees. The undertaking was massive given the size but Swift was profitable at the time.
Over that period, the Swift fleet has seen its operating ratio (inverse of operating margin) improve from approximately 93% to sub-80%.
U.S. Xpress potentially presents a tougher challenge as it has been operating at a loss before interest expense and other items below the operating line are considered. The company booked an adjusted net loss of $32 million last year and net income of just $8 million in 2021, a record year for trucking. Its consolidated adjusted OR was 101.2% last year with its TL fleet operating at a 102.4% mark.
Given the falloff in earnings, the company was carrying debt leverage of 8x — 14x when including operating leases.
The $808 million transaction enterprise value represents just $324 million in equity with the remainder coming from the assumption of debt.
However, the scale of this acquisition may be more manageable.
U.S. Xpress operates 7,200 tractors, 1,000 of which are provided by independent contractors. Swift’s fleet was 18,000 at the time of the 2017 acquisition by Knight, which also included owner-operators. U.S. Xpress’ $2.2 billion in revenue is mostly generated from asset-based fleets, with dedicated accounting for $800 million and its irregular route, over-the-road fleets representing $1.05 billion ($300 million from Total Transportation of Mississippi).
Of those fleets, only Total Transportation is operating near Knight-Swift’s OR target, according to the news release.
The goal is to bring U.S. Xpress’ consolidated OR to a high-80% range by 2026. Over time, the fleets should approach margins near the Knight-Swift TL fleet, which operated at an 80.4% adjusted OR last year.
Knight-Swift has expertise running irregular routes on a large scale and will use the merger playbook to integrate the acquisition. Swift executives Tim Harrington and Josh Smith, who had key roles following the merger, will lead U.S. Xpress as president and CFO, respectively.
Current U.S. Xpress CEO Eric Fuller and CFO Eric Peterson will remain in place through the closing.
The acquisition is expected to be accretive to Knight-Swift’s adjusted earnings per share beginning in 2024, with more than $1 per share in accretion occurring in 2026.
“Critics of the deal might say that USX’s profitability track record (or lack thereof) over the last 5 years makes this a risky deal,” Morgan Stanley (NYSE: MS) analyst Ravi Shanker told clients Tuesday. “However, we believe therein lies the opportunity. We get SWFT vibes from this deal — KNX has a proven track record of taking low profitability TL operations (with a reasonable amount of scale) and dramatically improving the margins in reasonably short order.”
He pointed out that in some quarters Swift’s OR outperforms the legacy Knight operations, which “may have been unthinkable in 2017 when KNX bought SWFT.”
In 2018, U.S. Xpress went public at $16 per share. If approved by shareholders, the company will be taken out at $6.15 per share.
The deal is expected to close late in the second quarter or early in the third quarter. Once combined, Knight-Swift will generate roughly $10 billion in annual revenue with a TL fleet of 25,000 tractors and 93,000 trailers.
Disclosure: FreightWaves founder and CEO Craig Fuller retains ownership of U.S. Xpress shares through a family trust.
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