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Saturday, April 13, 2024

2023 is a buyer’s market in trucking M&A

This has not been a banner year for the trucking industry.

Economic conditions have erased the gains in tonnage and profit since the start of the pandemic. We are in a freight recession.

In March, load volumes on Canada’s spot market were down 53% year over year. Truck postings surged 29% from February, with 2.5 trucks posted for each load available on Loadlink’s load board.

When the biggest contract carriers are trolling the load boards for transactional business, you know a ton of iron is collecting dust.

This dramatic shift is having a big impact on acquisitions in the business. Here’s what to expect in the months ahead.

(Illustration: istock)

It’s going to get busy

M&A activity is not going to stop because business has cycled down. Everyone I speak with anticipates a robust deal pipeline and strong interest from both buyers and sellers.

We probably won’t see the mega-deals of the past two years. But the appetite for scalable third parties, strategic real estate, and regional bolt-ons remains strong.

Even though trucking conditions have put many strategic buyers on the sidelines, there is a lot of interest from international buyers, private equity, and family offices. Financial buyers have piles of cash that need to be parked.

The buffet playbook

It’s a buyer’s market, but given the cost of money and the need to show quick results, there’s less tolerance for risk. There is also a noticeable absence of first-time buyers in the market.

But savvy, experienced buyers with cash and good balance sheets are on the prowl. They’re taking a page from the Warren Buffet playbook, which preaches that down-markets are the best opportunity to buy good companies at reasonable prices. In trucking, an acquisition takes the trouble out of growing organically and finding drivers who want T4s.

It’s a buyer’s market. Expect the buyers to keep buying.

Valuations to soften

As a rule of thumb, higher interest rates and fewer active buyers mean lower valuations. There is no doubt that valuations will soften this year after record multipliers during the pandemic.

Many people I spoke with expect a disconnect between what sellers want and what buyers are prepared to pay. Buyers don’t think the numbers from the past two years are sustainable. They certainly don’t think it’s a good reflection of future earnings.

Buyers may be on the hunt for bargains, but they will pay well for companies with low customer concentration, a niche (vertical or geographical), and real estate. There is no doubt that sellers will be held to higher standards regarding future growth plans and customer retention.

Legacy carriers frustrated

This freight recession has been hard on owners of small and mid-sized fleets. Their frustration is at an all-time high.

After a great run, the pricing pendulum is now clearly on the shippers’ side. Owners are tired of losing long-time customers over stupid prices that are often below their operating costs. They are tired of fragile customer loyalty. They are tired of trying to find drivers who want to be employees. Out of principle, many would rather retire before they have to pay drivers as independent contractors.

Exhausted, many legacy carrier owners are looking for an off-ramp out of the industry.

Experimenting with Driver Inc.

C-suite types face a new reality: Driver Inc is here to stay. With Ottawa providing little more than lip service about enforcement, many carriers have determined that if you can’t beat ’em, join ’em.

Buyers are weighing the pros and cons of carriers that pay drivers as independent contractors. By acquiring a Driver Inc. fleet and keeping it separate, they can dip a toe in the water and access more drivers without damaging their brand or creating tax liabilities.

It might be an experiment in the short term. It might be necessary as the driver market continues to evolve. For all the complaining about Driver Inc., it isn’t a foreign concept to carriers that use the model in their brokerage division.

While freight markets have cooled, expect the M&A market to heat up. With the unsustainable rates many of these spot-freight specialists are charging, there’s a good chance there will be no shortage of sellers soon. And the buyer’s market will gain more steam.

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