Strong Activity Is Expected in the Intermodal M&A Market

 
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THIRD QUARTER 2022

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Strong Activity Is Expected in the Intermodal M&A Market

Mergers and acquisitions have been, are and will be a prominent feature of the intermodalmarket, four top industry experts told Intermodal Insights.

"Intermodal continues to increase in attractiveness," said Chief Executive Ben Gordon, Cambridge Capital and BG Strategic Advisors. "As long as companies can deliver growth and provide meaningful margins, the [M&A] demand continues to be strong."

There are a total of six logistics-related transactions in process at Cambridge and the private equity firm.

Spencer Tenney, CEO of the Tenney Group, agreed, saying there is high interest in intermodal acquisitions and sales, particularly when the service is efficient.

Evidence of that interest is record registration of potential buyers in the past three months.

Keybanc Capital Market’s Director Todd Fowler also agreed, saying "healthy is a good term to use for the M&A market."

The rail component of intermodal is attractive, Fowler said, because it can create additional capacity for shippers who have endured a tight trucking market over the past two years. Intermodal also appeals to shippers because of dollar savings as well as the environmental, social and corporate governance benefits, he added.

A recent major intermodal acquisition was STG Logistics’ purchase of XPO’s intermodal assets, which included more than 2,000 trucks and 11,000 containers, as well as Intermodal Marketing Company services.

Service Integration

Paul Svindland, CEO of STG, told Intermodal Insights that challenges in port trucking capacity were an important driver of the acquisition that allowed STG to "take advantage of our ability to totally integrate and take control of every aspect of our business."

Before the acquisition, a shortage of intermodal capacity forced STG to shift 50 loads a week at $4,000 more per load to the highway, he said.

The purchase of the former Pacer International, which was the third largest intermodal operator, was the latest of 10 STG acquisitions over a six-year period. It also was just one of several other recent combinations. In May, A.P. Moeller Maersk acquired Pilot Freight Services, and J.B. Hunt Transport Services acquired Zenith Freight Lines.

An even larger merger, the proposed combination of Kansas City Southern and Canadian Pacific Railway, is being reviewed by the Surface Transportation Board. It has scheduled hearings for Sept. 28-30 to evaluate the Canadian carrier’s offer, valued at $31 billion when it was announced in 2021.

"There is still huge demand from buyers," Tenney said, as companies such as Werner Enterprises and trucker Fraley & Schilling that haven’t made recent acquisitions are doing them now. "New leadership is more confident to not just grow organically, but to have acquisitions as a strategy."

"All of the factors that were driving record M&A levels a year ago are still there," said Tenney. He specifically cited the relatively inexpensive cost of capital despite recent interest rate hikes and the huge number of aging business owners who are looking to exit because they are entering or nearing retirement.

Market Conditions Matter

Optimism about the potential for intermodal M&A deals is balanced against the current and expected conditions in the broader transportation market and the North American economy.

Gordon said that despite high fuel prices and inflation causing ripple effects, his businesses are continuing to see a high volume of M&A activity.

"There is more uncertainty in companies’ forward outlooks due to changes in consumer buying patterns, the rising cost of debt with interest rates increasing, and higher fuel prices," Fowler said.

"On-time delivery continues to be vital to shippers. If the railroads can strengthen their reliability, intermodal stands to gain meaningful market share."
Ben Gordon
Cambridge Capital and BG Strategic Advisors

He also cited shipping delays, COVID-19 effects and the war in Ukraine as creating more uncertainty than during the past two strong years. Inflation has caused a squeeze on consumer discretionary dollars as they shift to more services, and away from strong goods purchases in the past two years, he added.

He said an important question is how potential buyers and sellers see the second half of 2022 unfolding amid some economic uncertainty.

"The question is how exhausting the past two years have been," he said, while noting that some companies still have excellent loads and rates in the current market.

Service Consistency Is Critical

There is another key factor – service – that is affecting the intermodal outlook in general, all four executives said.

"Intermodal would be a more attractive business investment if the railroads could improve their service levels," said Gordon. "On-time delivery continues to be vital to shippers. If the railroads can strengthen their reliability, intermodal stands to gain meaningful market share."

Fowler stressed the importance of service consistency.

"Given all the disruptions, BCOs are looking for ways to obtain greater consistency. The ability of all providers to improve service consistency will be beneficial."

"The system is clogged. All the carriers generically have got to improve their service levels," Svindland said. "That is the key thing to ensure intermodal growth and take freight off the highway. At times, intermodal transit times have been double expectations."

He also stressed reliability, saying, "If a load is promised for the fifth day, it had better show up on that fifth day."

Other Factors At Work

There are several other factors to consider as potential buyers and sellers evaluate the market.

"If you are exiting the market, buyers are looking for criteria such as not too much concentration in a handful of accounts and direct relationships with shippers. Buyers want that 'stickiness'," Tenney said. "They want an investment story that keeps them excited."

He anticipates that the market will evolve toward more all-cash acquisitions and transactions known as earnouts, which tie the final sale price to the performance of the company after it’s acquired.

"If you are a buyer, now is an ideal time." Gordon said. "Be clear about your objectives and decisive in your actions and you will find that you can get even more done in 2022 than in 2021 because your competition is more anxious. If you are a seller, while you may need to acknowledge the lower valuations in the current market, you can still succeed."

Fowler emphasized that buyers and sellers alike have had some pretty strong financial results over the past two years that can help to buy or sell a business in the current market. In addition, he said that M&A also is a convenient approach for companies seeking to fill a geographical hole in the business or seek to broaden their customer base.

Tenney said small- to mid-sized motor carriers who want to sell still have quite a bit of leverage because of past supply chain disruptions and capacity squeezes.

"There is more confidence that asset owners can be more responsive than in the case of businesses that use owner-operators."

Tenney also offered one other assessment.

"Buyers want to know can the business thrive with or without the current ownership," he said. "They want to be sure the financial house is in order and can withstand scrutinizing, especially with current times of risk and uncertainty. You want to be sure the financial house is in order so it can’t be used as an excuse not be acquired."

STG’s Integration

Svindland, who was chief operating officer at Pacer when it was purchased by XPO in 2014, provided a detailed perspective on STG’s acquisition, as well as a look at the company’s long-term strategy.

"Now that we have taken over that business, the integration has gone splendidly," he said. "The intermodal thesis has been proven."

Access to the domestic intermodal market was a key factor for STG, Svindland said.

That’s because it complemented the company’s legacy that has been tied to NVOCCs and freight forwarders that provided freight that traveled through STG warehouses.

The company’s focus on the BCO and the highly complex transload market is paired with related functions, such as Customs clearance-related services.

Homegrown software allows STG to handle the most complex transload possible, down to the SKU level in a cross-dock situation, Svindland added. Less than containerloads are sorted and sent to one or more of STG’s facilities.

"We have to do three things to make this business much more attractive down the road," he said. "Complete the integration, get all systems working together and get the service reliability."

He anticipates that acquisitions would resume in 2024 after those steps are completed, with a particular focus on drayage operations and IMC businesses.

"We have identified companies that add value to our platform that will help us to grow organically and add new customers," Svindland said.

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