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buyer beware


Acquisitions in the Canadian trucking sector picked up momentum in 2011, led by transportation giant TransForce, which continued to collect companies under its umbrella. Some of the other big players (Mullen and Contrans) were also busy, each running three or four new flags up their masts. The heightened activity is the result of the emergence of a buyers’ market, with similar conditions as those experienced in 2006. Some established trucking businesses may have become over-leveraged. A few regional operators, struggling with chronically low volumes combined with rising fuel and operating costs, are finally throwing in the towel. Even some lean and gutted operations, having survived the last recession, have decided it’s time to exit the business. And in some cases these are family-run businesses, where the succession lineage may have run its course, and there are no kin willing or capable to take over the reins. In December of 2011, industry-watchers were shocked when MacKinnon Transport of Guelph,Ont. announced it was filing a Notice of Intent to restructure under Canada’s Bankruptcy and Insolvency Act, and selling its van operation to the Laidlaw division of Contrans. In an ironic twist of fate, the family-owned company’s economic woes may be in part the result of an acquisition-gone-wrong. Just two years earlier, MacKinnon had merged/acquired L.E. Walker Transport of St. Thomas in a move that looked like a good fit. But the deal went sour a year later when L.E. Walker, which had been run separately from MacKinnon, had its loan called in. “I don’t know if there’s a better time or a poorer time to buy a company,” says Stan Dunford, chair and CEO of Contrans. “Obviously the best time is when the price is the lowest. But what you need is a crystal ball to tell you how it will be doing in two or three years. Some of the (acquisitions) you work on for years trying to get all the pieces to fit, and others just drop in your lap.” While waiting for the court to decide on the legalities of the MacKinnon deal in early January, Contrans Group announced it was purchasing Wilburn Archer Trucking, a dry bulk operation in Norwich, Ont. This property seems closer in line with Contrans’ primary focus on speciality niches. “There are few opportunities to acquire dry bulk trucking businesses in Ontario,” says Dunford. “I like the speciality markets, anything with a high entry level, specialized equipment and specialized drivers–the more complicated the better.” For the most part, conditions have been favourable for those companies with solid financing in an acquisitive mood. According to Dan Goodwill of Dan Goodwill and Assoc., “The big boys have been busy. But these are well-thought out deals. What they’re looking for is a sound business model, a strong management team that can produce consistent financial results, quality equipment, and a team of drivers. Drivers are a key asset but only one reason to buy a company.” Industry-leader TransForce has landed several significant purchases to strengthen the depth of its core areas: courier, LTL, TL and speciality trucking. Already firmly established in domestic parcel service as the owner of Canpar, it recently added ATS Retail Solutions and ICS Courier. In 2011 it purchased DHL Canada (now operated as Loomis) giving it more domestic and international positioning, as well as US-owned Dynamex for $248 million, supplementing its presence south of the border. On the speciality side, the corporation has solidified its presence in Quebec and eastern Ontario by recently getting control of 100% of LaFleche Environmental, of Moose Creek, Ont. On the LTL front, TransForce bolstered its presence by picking up Quick X Transportation, giving it a bigger footprint in Canada and more access in the US. “Buying Quick X is a big deal in itself,” says Goodwill. “TransForce now has some pretty big properties in several key sectors of the transportation industry.” From humble beginnings as Cabano Transport in Cabano, Quebec, and under the leadership of CEO Alain Bedard, TransForce’s credo of “growth through acquisitions” appears to be paying off. “All of these big trucking companies feel it when the economy gets tricky,” says Walter Spraklin, analyst for RBC Dominion Securities Inc. “But you’ll see that the TransForce share price has held up fairly well (third quarter results show TFI’s revenues up 43% over the previous year, and that it paid off $50.7 million in debt during the quarter). “The large players have done a good job at rationalizing their cost base, and haven’t added a lot of cost back into these new companies. They’re running fairly lean and a big company has the advantage and the discipline to walk away from business that’s not compensatory.” One wonders where Bedard is going to steer TransForce next? The answer appears to be south. Since 2010, TransForce has begun extending its tendrils into the US market. Besides buying Dynamex and Concord Transportation (a Canadian carrier with several US terminals), in 2011 it made a big step by moving into the US oil and gas business by acquiring I.E. Miller Services Inc., of Eunice, Louisiana; a move that gives it a strong position in the field independent of the Canadian oil patch. “One area that’s still open is the US,” says Goodwill. “This is an interesting one since the success rate of Canadian companies buying and running American companies has not been good.” Industry veterans might remember Maislin Transport which originally ran between Montreal and New York. The company expanded rapidly into the eastern US by purchasing Gateway and Quin Motor express in the 1970s, but it may have bitten off more than it could chew. Deregulation in the late 70s and a recession that followed forced it to close its doors in 1982. Canadian companies are understandably nervous about setting up shop in the US. Not only truckers, but retailers like Canadian Tire have tried to crack the US market and had to pull back. “I know very few success stories; some of them are even horror stories,” proffers Dunford of Contrans. “It’s a different culture down there, a different tax system, a different way of doing business. There are plenty of opportunities in our own backyard.” But companies like Trimac and TransForce are not so shy about doing business stateside. Trimac runs its US operation parallel to its Canadian division, and has been looking southwards since 1980 when it bought its first US business. Even its latest acquisition, Benson Tank Lines, services customers in the northwestern US as well as BC and Alberta. One of the few Canadian companies to have made a major investment in the US market, specifically the LTL sector, is Vitran Corp., which has been continually nibbling a bigger space for itself on the American side, making 13 acquisitions since 1995. In 2010 it sold its TL rolling stock to concentrate on its LTL business. Although the corporation presently seems to be in consolidation mode, Vitran now services 34 states and just opened a terminal in Sacramento. According to president and CEO Rick Gaetz, it expects to open two more US terminals in 2012. Vitran continues to struggle with the US LTL operation, but 2011’s third quarter results show revenues are up nearly 20% across the board from 2010, and it reported some good results from its logistics sector. Greg Rumble, COO of Contrans thinks this is a great time to be looking for acquisitions. “You get a chance to see what a company was able to do through the toughest economic times in 25 years. If a company has done reasonably well during the 2008-2010 period, I’m willing to pay for that…we’re prepared to pay for companies that have done well through the recession,” he said in remarks before a panel at the OTA convention in Toronto in November 2011. But at least one CEO takes a slightly differing position. According to Murray Mullen of Mullen Group: “To have a good transaction both the buyer and the seller have to come away with something. Right now the valuations are low. You can buy companies cheaper right now, but the market doesn’t give you any credit for determining f
uture earnings. All you’re doing is trading cash for future earnings, but I don’t know how to value earnings because right now the market is in such a state of flux. If you are going to buy an organization you can look at the history, but that only gives you half the picture.” Mullen has carved a dominant and unique niche in the Alberta oil services and trucking sector. In a telephone interview the CEO explained his outlook. “You have to know the sector you’re in well and not to stray too far from it. Sure there are a lot of opportunities in the US, but I’m not smarter than the guys in the US. You’ve got to be good at what you do and know what that is.” Mullen estimates that his Group looks at about 100 potential acquisitions every year. “Of that there may only be 10-15 that interest us, and from that number, we acquire three or four on average per year,” says Mullen. According to Groupe Robert president and CEO Claude Robert, buying a company just to get bigger is never a good idea. “You have to ask yourself, does this fit with my business plan, and will the company keep making money for me after I buy it? In many cases these are one-man operations with the loyalty of three or four or maybe five main customers. What’s to stop them from going with another carrier after you buy the company? It doesn’t matter if you’re big or small. Making a bad acquisition means you’re just throwing your money away.” Robert also points out that difficulties can arise when trying to integrate the management and personnel of the new acquisition. “Management styles may be completely different. In my opinion mergers are much more difficult to accomplish than acquisitions. There may be a problem blending the two cultures together. Every time you get bigger you lose efficiency. You need a good organizational team to make it work, and good management is hard to find.” Sometimes buying up a competitor makes sense. It automatically increases market share and may allow the buyer opportunity to take some capacity out of the system. But RBC’s Spraklin thinks this can be a problematic manoeuvre. “If you’re buying a company in an effort to shrink capacity and increase pricing, you better get that company pretty cheap, because in a sense you’re paying for trucks you’re going to park,” he says. “In some cases, the economics work, but you’ve got to be big enough to have an overall effect. If you’re a tiny company you’ll only produce a small ripple. Sure it’s a buyer’s market right now, but the big question is, do you have a balance sheet that can afford it?”


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