There is a player that might be emerging on the U.S. parcel delivery landscape: private equity.
In a deal that banking sources said was consummated about two weeks ago, regional parcel delivery carrier LaserShip, which is owned by PE firm American Securities LLC, acquired fellow regional carrier OnTrac for what is believed to be $1.3 billion, a significant sum for a regional parcel company. Greenbriar Equity Group LP, another PE firm, sold LaserShip to American Securities early this year but retains a minority position.
The deal combines the two largest footprints in the regional parcel industry. LaserShip, based in Vienna, Virginia, serves 23 states from Maine to south Florida. Its network extends as far west as Indianapolis. The company in late May expanded into Tennessee and has publicly expressed an interest in entering Chicago.
OnTrac, based in Chandler, Arizona, serves eight Western states, including all of California. Its network stretches as far east as Colorado and touches the country’s northern and southern borders from Washington to Arizona. OnTrac has not geographically expanded since entering Idaho in 2013.
The combination was first reported Wednesday by Business Insider, which cited an Oct. 6 analysis of LaserShip by rating agency Moody’s Investor Services Inc. The transaction was mentioned prominently in Moody’s report.
The rating agency said it expects LaserShip to operate OnTrac’s network separately at least through the peak holiday delivery season. However, LaserShip will eventually look to “offer national shipping capabilities” to its customers, Moody’s said.
There will still be gaps on the national grid, including in the Midwest, small parts of the Southeast and, most importantly, Texas. Moody’s said it expects LaserShip to further expand into the Midwest next year through acquisitions or internal expansion. According to a source, there are discussions underway in Texas for a financial institution to fund a regional parcel push into the Midwest.
Regional carrier LSO, based in Austin, Texas, covers all of Texas and much of Oklahoma. LSO expanded into the Midwest in June with service to select parts of Missouri, Illinois and Kansas. It also deepened its existing coverage in Louisiana and Arkansas. LSO CEO Richard Metzler said the company was unaware of any discussions to expand further.
LaserShip and OnTrac combined have about $1.7 billion in annual revenue and about $225 million in combined earnings before interest, taxes, depreciation and amortization. LaserShip earns about $141 million of that total, according to a banking source. LaserShip’s EBITDA margins are in the mid-teens, while OnTrac’s is in the high single digits, according to Moody’s.
The companies, which don’t operate any transportation assets, deliver virtually all of their parcels on the ground with one- to two-day transit times. Both have greatly benefited from the surge in e-commerce delivery demand since the COVID-19 pandemic began in March 2020. OnTrac declined comment, while American Securities and LaserShip did not respond to requests for comment.
Regional carriers are considered reliable and efficient operators within their respective territories and are in a sweet spot with elevated demand and with disaffected shippers souring on national carriers FedEx Corp. (NYSE: FDX) and UPS Inc. (NYSE: UPS) because of erratic service during the pandemic, as well as higher rates and delivery surcharges, the latter being fees tacked onto pickup and delivery services. Regional carriers have fewer and less onerous delivery surcharges than FedEx and UPS.
Parcel carriers are privately held and their size would not make them big-ticket acquisitions for a deep-pocketed institution that could then fund a rollout of a national network.
There has been talk for decades about cobbling together a national network out of a group of regionals. However, nothing has ever come out of those discussions, largely due to the lack of IT interoperability across the various networks. Many large enterprise shippers have historically tendered most of their parcels to FedEx and UPS because both covered the entire nation and supported their networks with robust technology. As a result, the regionals in total never got above mid to high single-digit market share.
The last 19 months have rewritten the narrative. Demand by big shippers for regional parcel services has spiked to unprecedented levels. It was rumored that one regional carrier stopped accepting new customer business for the holidays as early as April. The expansions of LaserShip and LSO were seen as responses to shipper demands to broaden their service areas.
Jason Murray, CEO of e-commerce shipping platform Shipium, said in an email Wednesday that it will take at least a year for the deal to bear operational fruit. The most immediate impact for shippers will be the ability to use one entity to do business with both networks, he said.
The most meaningful long-term benefit, according to Murray, is that, for the first time, two regional carriers have been brought together to serve the national customer bases of retailers. If a retailer had inventory in California that needed to be delivered in New York, regionals offered little value because they lacked the infrastructure to support the long-haul leg known as middle mile, Murray said. However, a LaserShip-OnTrac combination would “take care of cross-national transport between their regional networks, thus turning them into a true ‘national carrier’ option for most of the … population.”