The days of the small independent truck fleet, owned by the rugged, entrepreneurial, have-truck-will-haul individualist that traditionally made up the Canadian trucking landscape, appear to be waning...
The days of the small independent truck fleet, owned by the rugged, entrepreneurial, have-truck-will-haul individualist that traditionally made up the Canadian trucking landscape, appear to be waning in the current marketplace of transportation mergers, acquisitions and consolidations. In recent years, the number of small carriers of 10 trucks or fewer has dropped from 8000 to about 6000, according to the latest available government count. And while the small carrier will always have a place in the Canadian market, pundits expect this trend to continue over the next decade as shippers, who are experiencing a parallel trend towards bigger and fewer players in their own marketplace, prefer to team up with large, sophisticated logistics providers.
Fortunately, these changes are leaving minimal casualties, according to Bob Pielsticker, practice leader, transportation services, KPMG LLP. Instead of bankruptcies, smaller companies are mostly being taken over by larger carriers. “I actually view the removal of the small end of the practice as a positive, win-win scenario,” he says, adding this has had the additional benefit of taking some of the older equipment off the road with no decrease in the number of people employed in the transportation industry “because every good driver will have been picked up by another carrier.”
Beth Enslow, vice president enterprise research, Aberdeen Group, says a convergence of issues is driving consolidations, led by two key factors. One is shippers moving to reduce their management burden and to negotiate better rates by giving larger shipping volumes to fewer carriers. This has triggered the rise of full-service carrier operations, i.e., logistics companies, handling long haul, regional and metro deliveries.
The second is ramping technology and regulatory costs. “The level of technology now required to remain competitive from a productivity and customer service perspective is higher than ever before. Shippers want more visibility and more time-definite delivery. FAST certification and other regulatory costs also place a burden. Under-capitalized carriers find it hard to ‘keep up with the Joneses’ in this area,” she says.
According to a new benchmark study by Aberdeen released in January:
* “Eighty-seven per cent of the study participants say customer service improvements from mobility technology have met or exceeded their expectations. Smaller fleets typically achieve greater than 10% boosts in fleet productivity and on-time delivery or service performance from deploying mobility.
* Fully 80% of the study participants have current budgeted projects for improvements across two or more of the major fleet mobility areas: basic driver communications, value-added information collection, automatic vehicle location (AVL), and vehicle sensors.”
In an industry that has traditionally not performed beyond 5-7% earnings before taxes and amortization, making the necessary investments to remain competitive is more onerous for the smaller carrier, says Mark Borkowski, principal of Mercantile Mergers & Acquisitions. “A lot of these smaller players were also forced out by the large trucking lenders,” he adds. “Major vendors came into the market and financed the bigger players that were stable. These companies grew and could make acquisitions and are now mid-sized companies, while the smaller firms often weren’t in a position to get backing.”
“Accretive Income Trust Seeking Profitable Trucking Firm”
Up until the last decade, Canadian trucking was an owner-managed industry. Income trusts are changing that. TransForce, based in Quebec, and Contrans, formerly the Laidlaw operation based in Woodstock, Ont., are leading the charge. Borkowski estimates the two trusts have bought up dozens of companies in Canada.
Pielsticker characterizes income trust acquisitions as typically well-run, midsize Canadian carriers. “They don’t look for any particular configuration, i.e., I don’t see any predominance of LTL or truckload being the target. It’s more that the income trusts are looking for well-run businesses that can deliver sustained cash flow,” he says.
Borkowski delineates a second group of buyers in Canada as strategic buyers. “These range in size anywhere from 100-truck operations to companies with revenues in the hundreds of millions. They are expanding from one locale to another, typically looking for regional operators. They are both Canadian as well as American companies,” he says.
Vitran, a North American LTL and logistics company, is an example. “When we finish our acquisition and growth strategy, we expect to be able to back into a customer’s door anywhere in Canada and the US and move that shipment to its destination in a Vitran-controlled environment. We expect to have representation throughout the entire US as we do today in Canada and we’re well on our way to establishing this US presence,” says Rick Gaetz, Vitran’s CEO.
These days, it seems that US carriers have more to offer to Canadian carriers than vice versa – at least according to Gaetz as well as Joe Denny, chairman of Chapman & Associates, a US middle-market mergers and acquisitions firm. For each American purchase of a Canadian company, Denny sells two US carriers to Canadians, and cross border deals represent less than 10% of his work (the balance being American carriers buying American carriers).
The prospect of mega mergers like Roadway-Yellow in the US is considered unlikely in Canada because of relative market size. Greg Rumble, president & CEO of Contrans, says, “Down in the States, you’ve got very large, billion-dollar companies, guys like JB Hunt that are basically in one or two types of truckload business. In Canada, we have just one and it is in a multitude of different businesses.”
Conceivably, an income trust could become an acquisition target for a US firm. But such a move, among other obstacles, would face the challenge of the income trust structure itself. This uniquely Canadian financial arrangement, which shifts the tax burden to unit holders, is not a natural fit for American public companies. It proves awkward even for income trusts on the acquisitions trail in the US. Consequently, Contrans, which has potential US acquisition prospects sent to it for consideration on a regular basis, hasn’t yet bought an American carrier. But Rumble doesn’t rule it out. “As an income trust, anytime you’re looking for an acquisition in the States, you have to make sure that it is tax effective. In Canada, the taxes are very minor, so you’re looking for yield,” he says. “If I go into a jurisdiction where tax is paid to a government source, that reduces the yield. So you have to be very careful on how you either structure the deal or ensure that the returns in the deal are satisfactory even after you pay whatever tax has to be paid.”
But Gaetz clearly sees the “possibility that one or two of the larger US players may want to gain greater exposure into the Canadian marketplace. That’s a realistic possibility in the next few years.”
The Five- and 10-year Plan
Few will argue that the consolidation trend will continue.
And according to Enslow, this is precisely what Canadian shippers are looking for: fewer carriers that have high levels of technological capability providing higher levels of time-definite delivery and value-added information access.
Still, the industry will continue to offer niches for the small guy, Borkowski insists. The rugged, free-enterprising trucker can, and is, making a stand amidst the mergers and acquisitions, albeit in a different form. On their own, they may have been sinking under a burden of rising insurance and fuel prices, the necessity of investing into technology and securing financing for new equipment, but many are rising as owner-operators under recognizable company banners with deeper pockets.
And Borkowski still sees some room for small start-ups.
“The beauty of the transport in
dustry is that it offers so many specialty niches from refrigerated traffic to specialty products. So there’s always going to be room for the little guy to enter the market.”
But as these companies become successful and grow in size, they too may end up plucked off by bigger players. Whether that’s a good thing, of course, depends on whose perspective is being considered. The argument in favor of consolidation, and the hope, is that bigger companies will be able to move freight more efficiently, negotiate better insurance rates, and perhaps be in a better position to obtain higher freight rates, in turn improving capacity, pricing and even the driver shortage. As Gaetz puts it, “The reality is that as we charge more we can pay more and that will attract more people into the driver space. It’s that simple.”
Veteran writer Paul Stastny combines his transportation background with his education in political science and international trade to write about supply chain management and transportation issues. He has a deeply rooted understanding of the industry drawing on his past experience as a risk manager/marine underwriter of freight forwarders and motortruck carriers.