Despite a handful of high-profile deals that made headlines across the country, the mergers and acquisitions (M&A) activity in the Canadian trucking industry isn’t exactly booming.

“I thought it would have been a stronger year than it was,” said Oakville, Ontario-based Douglas Nix, vice-chair of Corporate Finance Associates. “We’ve seen across all fronts, a decline in M&A activity in 2013 over 2012, and 2012 wasn’t a knock-it-out-of-the-park kind year. Organizationally, it’s not just Canada, but North America, where I think the numbers are off 40%. The hope is 2014 is going to be better.”

Mark Borkowski, president of Mercantile Mergers & Acquisitions Corp., in Toronto has also seen M&A activities slow.

“The transportation industry, at one time, was the most active. That’s changed. It’s not at the moment. Although people in transportation think transportation deals are booming, they’re booming in ports, they’re booming in outlying types of businesses. They aren’t booming, by any means, in pure transportation, except by two major buyers—TransForce Inc. and Greenbriar Equity Group—who have had their pick of the litter.”

Opposing viewpoint

Eric Castonguay, a Toronto, Ontario-based partner at PwC Canada, has a different view. He feels M&A is healthy.

“Lately, there has been a fair bit of deal activity. In Canada there have been some public market deals that have transpired. There are a number of fundamental aspects to the market that have recently driven deal economy and will continue to drive activity in the next 18 months,” he said. “Most of the activity we are seeing is in the medium-size market. Those would be deals in the $20–$200 million range.”

M&A landscape
What everybody can agree upon, however, are the market conditions that make deals possible. Low interest rates are beneficial to companies seeking leverage financing. The lending market has opened up since the tightening caused by the 2008 recession. Mature markets with few opportunities for growing market share organically (especially without driving rates down or competing for customers or drivers) create an atmosphere for growth through acquisition. Companies that survived the economic downturn and have begun to thrive again have strong balance sheets and are well capitalized. And businesses owners (many of whom founded their companies when the industry was first deregulated) planned to sell as their succession and retirement strategies were completed are finally ready to do so.

The deals

When deals do happen, they tend to have one common element: all of the businesses that are acquired are well-run.

“Buyers really differentiate between well-run trucking companies that have invested in rolling stock and TMS and things that optimize their business, and that have clients with sticky relationships, as opposed to just hauling broker business. For companies that have really underinvested, it’s more difficult to sell at this point,” said Castonguay.

>Beyond the criteria of being well-run, having a niche or specialization tended to help companies court business suitors.

“Specialized freight and specialized markets tend to be attractive because there are larger barriers-to-entry and typically higher switching costs for the customers,” said Castonguay.

Businesses that have expanded beyond trucking to offer warehousing, logistics, or non-asset-based services also seem to have more to offer the market.

“Logistics is very hot. And people that do different, specialized logistics are doing very, very well,” said Borkowski. “Transportation companies, in order to stay afloat, are buying warehouses. It gives them a leg up,” he said. “Logistics companies are all over the market, trying to buy up the more specialized transportation companies.”

Nix said, “the non-asset-based market is really strong. Valuation multiples are high. It’s the opposite of what you’re seeing in the asset-based operations. It’s a dynamic market right now.”

Valuations

Many factors influence how much a company is worth, but the basic sale price is derived in a fairly straightforward manner. First, a calculation is made based on the company’s earnings before interest, taxes, depreciation, and amortization, or EBITDA. Then a multiple is applied to the EBITDA. The multiple tends to reflect how large the business is, how solid its customer base is, and what type of business it’s in.

While PwC’s Castonguay says companies today are worth more than they would have been in the past, Nix and Borkowski say prices are dropping, in part due to falling multiples.

“Multiples on average, for an average transportation company, used to be 4.3-4.4%. They’re now 3.5-3.6%. That’s a very big drop. So now owners say, ‘I’m not going to sell, I’m just going to keep it,’ and that’s what they’re doing,” said Borkowski.

To put multiples in perspective, Nix looked at the deal that saw TransForce acquire Vitran.

“The Vitran-TransForce deal was one of the higher price valuation deals. When the dust settled, their valuation multiple was something over seven times. What we’re seeing in the private market, the higher quality assets could be selling for up to five times normalized EBITDA. The more standard ones, at the low end maybe 3.5 times EBITDA, to 4.5 times, in that range.”

The buyers

Essentially there are two basic types of buyers: companies in the transportation industry and private equity firms.

Private equity firms take a short-term approach to acquisitions. They want to buy a company, make it more profitable and then resell it relatively quickly. Borkowski described a typical private equity firm’s approach to an acquisition

“They buy with a lot of leverage. They buy with a little bit of cash down. They will produce about 25% of their own cash down. They will go to the institutional markets. They will borrow mezzanine financing that will probably amount to another 40%. They’ll come up with 65% and they will give the seller 65% of the purchase value in cash, but the vendor is in third place with his final 35%. He’s in the third position behind the mezzanine financing if they don’t make it work.”

Besides stripping new acquisitions of excessive headcount and unneeded assets, private equity firms tend to merge smaller companies into bigger ones, making them more attractive to subsequent buyers, and even to customers.

“Canadian trucking companies need to grow in size to effectively compete in the marketplace,” said Nix. “You need a larger size in order to make the investment in technology, a larger size to get access to driver pools, and a larger size to access economies of scale on maintenance and repairs and tire programs and insurance. I think it’s foundational.”

Businesses that are already players in the transportation industry tend to want to either add new capabilities, or to dominate a particular part of the market, which is what Borkowski said TransForce is attempting to do.

“TransForce became the king in the package and courier business. They got into that business in a serious way. They made a number of acquisitions and are now competing with UPS. They acquired Dynamex, Canpar, ATS, Loomis Express, ICS Courier, all next day companies, except Dynamex, which is sameday.”

Future outlook

Nix expects 2014 will see more M&As. Castonguay too sees the coming year as a good one, and so does Borkowski who’s confident there will be at least one big deal. “Purolator will be bought by either TransForce or by a US private equity firm. Right now it’s the weak sister and the rumour is Purolator is a target.&rdq
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