The transportation sector is one of the top employers in North America, and indeed, in the majority of U.S. states, truck driving is the single most popular occupation. But because the industry and what it does is so complex, there are no truly dominant players in the space (excluding the class 1 railroads). Trucking especially is very fragmented, with the great majority of fleets smaller than twenty trucks. There are a couple of reasons for that: one is that there are almost no barriers to entry to start a small fleet, and the second is that large carriers with irregular over the road volumes have difficulty retaining drivers and growing their fleets organically.
An outsider looking at the industry would think that it’s ripe for consolidation: in a capacity-constrained market with falling service levels, carriers who can guarantee coverage stand to suck in even more volumes. Since it’s both risky and difficult to grow a fleet quickly by adding drivers, it stands to reason that the easiest way to pump top line revenue would be through mergers and acquisitions, and indeed, it’s what growthy companies like XPO Logistics (NYSE: XPO) and Daseke (NASDAQ: DSKE) have done, specializing in certain types of equipment and freight and tacking on as many companies as they can.
There’s just one problem with aggressively pursuing an M&A growth strategy: since the trucking market flipped in the second half of 2017, there are far many more buyers than sellers. Deep into the longest economic expansions in recent history, large companies are awash in cash and looking for a place to use it productively. In the United States, the Trump administration’s corporate tax cuts and adjustments to depreciation rules added fuel to the fire. On the other hand, small trucking companies are doing better than they have in years, and they’re happy to continue raking in profits on inflated rates and strong volumes.
“Our job is to convince people it’s the best time to sell,” said Peter Stefanovich of Left Lane Associates, a new M&A advising firm for the transportation and logistics industries based out of Toronto. Left Lane was founded in 2015; Stefanovich came from a business development background at a third party logistics provider, but his partners’ experience extends Left Lane’s portfolio to cover truckload carriers, LTL, freight forwarders, brokerages, and even warehousing service providers. Left Lane has helped put together about twenty deals since its was founded. Left Lane Associates is a team of eight, but will continue to scale up, Stefanovich said.
Stefanovich pointed out that it’s best to sell when times are good, when your company is worth the most, when buyers have easy access to capital, and while you, the seller, have leverage.
“There are four Ds that can take away a small business owner’s power in a sale: a delinquent partner, death, disease, or divorce,” Stefanovich said. “If any of those happen to you, suddenly you have to sell, and the leverage flips to the buyer’s side.”
Left Lane Associates is not an investment bank or a private equity group, just an M&A advisory service. Stefanovich said about 80% of their business was in transactions themselves, with about 20% on consulting to get companies sell-ready.
“Buyers we represent are looking for synergies on multiple fronts,” Stefanovich explained. “One is cultural—how growth driven are you? Are you looking for steady growth or exponential? Is it sales-driven or by acquisition? Buyers also want to acquire to help build up the commodity lane or vertical they’re in, or may decide to get into something new, to backfill a gap in their business model. The majority of companies want to focus on something they’re good at, focus on the niche they’re in.”
At the moment, Stefanovich is working with Apps Transport on building up their cartage capacity and is helping Titanium Transportation Group (CVE: TTR) look for small to mid-size cross-border carriers to buy. Small and mid-size in Canada, though, are on a different scale than American companies; Stefanovich said that while a ‘small broker’ in the United States might have gross revenues of $10M, a small broker in Canada might bring in $1M annually.
There are a lot of small transportation companies out there whose owners are beginning to age and who should probably think about selling. There are a number of economic indicators suggesting that the current cycle is maturing—the flattening of the yield curve, the softness in housing starts and sales, rising inflation and Fed rates, declining consumer savings rates, you name it.
If that’s true, then we can expect a contraction or recession at some point in the not-too-distant-future, which will bring a one to two year downturn, followed by a recovery. From there, it could be another two years before the transportation sector reaches the same strength it has now. In other words, transportation company owners who don’t feel quite ready to sell now should ask themselves whether they’re prepared to wait out a five year downturn and recovery cycle to get the same multiples they could get today.