No better time than the present to determine your best path out of this mess

For at least 18 months now I’ve been hearing about “zombie” truckers, motor carriers which are barely able to meet payroll from week to week yet somehow manage to hang on. Their continued existence maintains the capacity overhang that deflates rates since freight volumes during this recovery, especially in the LTL sector, are not growing as quickly as during prior recoveries. No doubt their desperation to secure any business that can keep them afloat for another week also contributes to depressed rates for the industry overall.
I’ve also been hearing for the last 18 months that until the lending institutions pull the plug on these severe underperformers the industry will continue to be mired in its over capacity/low pricing glut. Well folks, we may be waiting for a long time for that to happen.
Elian Terner, director, investment banking for Scotia Capital, was at our recent Carrier Workshop, sponsored by Peoplenet Canada and conducted in partnership with Dan Goodwill & Associates. Terner is a rising star in our industry and he provided his take on the industry’s future direction and what trucking executives must consider to best position their companies for the years ahead. You may not like what he had to say. Terner acknowledged that lenders have been reluctant to force delinquent operators into bankruptcy; used truck prices are still low enough lenders would not get much in return when selling off the equipment.
Would improved pricing for used iron change things? Perhaps, but as Terner pointed out, lending institutions don’t really want to be operating trucking businesses. “Generally speaking they’re not in the business of seizing assets. That’s not what they want to do. In many ways it’s better for them to keep the company alive,” he said.
So if the lending institutions don’t want to fix the industry’s problems then what? We should be doing what needed to be done all along; fix them ourselves.
1.For companies looking to grow organically, there needs to be a focus on limiting capacity. As Mark Seymour of Kriska Transportation recently pointed out at Transcore’s strongly attended users conference: “We are here to create a model we can live with for years rather than months.” That means not adding capacity unless absolutely certain of its long-term need and not getting trapped into other people’s pricing. Market share don’t mean a whole heck of a lot if you’re bleeding red while trying to achieve it.
2.For companies looking to grow by acquisition, Terner believes a number of attractive opportunities exist to acquire troubled carriers. “Consolidation will be a key theme for the trucking industry over the next several years…A highly competitive M&A market will be led by large firms focused on growth by acquisition and financial buyers with strong cash positions,” he says. But before that happens the companies in a good position to be acquirers need to get over their current cautious approach. Few seem willing to risk making a bad investment so soon after recovering from a nasty recession.
3.Company executives looking to sell need to get over their “wait and see” attitude. Those who may want to sell seem to be held back by the cold reality that their company is not worth anywhere near what it used to be. Also, many independently owned and operated trucking firms in the Canadian market do not have firm succession plans in place and in many cases no family members waiting in the wings and interested in becoming second or third-generation operators. Both those factors are pushing owners who could be selling towards a wait and see attitude. Yet, these are times when “wait and see” can have very negative consequences. That was made abundantly clear by the numbers provided by Terner. Consider that back during the industry glory days of 2002 to 2007, when trucking company valuations were going off the chart, we hit a peak of 10.7 x EBITDA. During the trough of the recession trucking company valuations are down to about 4.2X EBITDA, according to Terner. As he pointed out, can you imagine how much was lost by people who took a “wait and see” attitude because they did not properly understand the market trends and their company’s value? A return to peak valuations will likely take another 5-10 years, according to Terner and will require substantial sustained EBITDA growth.
Seems to me like there is no better time than the present for motor carriers to, as Terner put it: assess their strategic positioning and determine the best path forward.

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With more than 25 years of experience reporting on transportation issues, Lou is one of the more recognizable personalities in the industry. An award-winning writer well known for his insightful writing and meticulous market analysis, he is a leading authority on industry trends and statistics.

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  • Dear Lou:
    An excellent overview of the transportation market seems to have taken place at your Carriers workshop.
    This is truly the best time to deal with the industry mess. Elian Terner of Scotia Bank is correct in this conclusions. Unfortunately, Scotia are not the only bank that lends to the transport industry. My experience with the other banks and leasing companies that they could “give a damm” and are not going to wait much longer before they start taking putting some of those that have fallen from grace into receivership.
    Mark Seymour phrased it very elegantly and offered some good advice. I wonder if anybody is listening. He proves that he understands the nature of the industry.
    The only advice I can add is that Transportation owners should consider firing some of their customers. Transport owners are doing it to themselves. In order to seek out growth, transportation companies change their rates downward.
    Elian Terner is correct in that the banks are not in the repo business. Equipment dealers have some much used equipment available, that the banks are reluctant to take the big write offs in trying to sell their equipment.
    Their is a secondary market for excess manufacturing equipment. It is being shipped to India, China and other low wage producing nations. Transport equipment is too expensive to ship overseas, thus their is an overcapacity.
    The solution is strategic mergers with other related companies. In these cases, there is no exit, just a sharing of facilities and people.
    Mark Borkowski, pres.
    Mercantile Mergers & Acquisitions Corporation
    (416) 368-8466 ext. 232